When you have two options in almost anything, whether it is food, a new toothpaste, or two blockbusters of your favorite actors, you will think a lot before choosing. For investors, CAGR and XIRR are two such metrics. New investors who are just getting to know the ropes of investing can get very confused because they often hear from more experienced investors that both are helpful in the journey of attaining long-term wealth growth. In this article, we will delve into the concepts of CAGR and XIRR to help you understand which one is more suitable for your specific goals.
What is CAGR?
CAGR is short for Compound Annual Growth Rate. What it means is, suppose you have an investment, what CAGR does is it represents your investment over a specific period of time [the specific period depends on the start and end date you choose]. When the market is volatile, what CAGR does is it smooths out the harsh waves of volatility and helps your investment show a consistent growth rate, making it easier for investors to compare performances of different investments.
What is CAGR Calculation?
The CAGR calculation formula is very simple:
What is XIRR Used For
If you have annualized returns from investments with multiple cash flows, you wouldn’t use CAGR—that would be suitable. You have to choose XIRR because it is built for that purpose. Investors in India rely on XIRR for SIPs in mutual funds, recurring deposits, and to track their portfolios as it accounts for the timing of each investment.
It also makes comparing different investment plans and actual returns over time easy.
What is XIRR Calculation?
The XIRR calculation is a bit more complex than CAGR because it has to handle multiple cash flows happening at different times. The formula looks like this:
What Each Symbol Means
- Cᵢ = cash flow at time i (money you invest is negative, money you get back is positive)
- tᵢ = date of each cash flow
- t₀ = starting date
In simple words, XIRR finds the annual return rate that makes all the money going in and all the money coming out (on their respective dates) balance to zero. You don’t need to solve this by hand. Tools like Excel or Google Sheets have a built-in XIRR() function that does it instantly. If you can’t use these tools or these metrics,
we are the best mutual fund distributors in Vijayawada and can help you make sound decisions.
Example: If you invest ₹10,000 every month in a SIP and then receive a maturity amount after a few years,
XIRR tells you the actual annual return by considering the date of each SIP payment.
CAGR vs. XIRR: Which One is Better?
- CAGR – Best for a single lump-sum investment held over a period of time.
Example: If you invest ₹5 lakh in Nifty 50 in 2018 and sell in 2023,
CAGR shows the average annual growth. - XIRR – Best for multiple or irregular cash flows, like SIPs, recurring deposits,
or when you invest and withdraw at different times.
Example: Monthly SIPs in a mutual fund. XIRR shows your true return, factoring in the timing of each payment.
Conclusion
Both CAGR and XIRR are powerful tools, but they serve different purposes.
At Profitszonemfd, we not only simplify these calculations for you but also
guide you toward the best funds to invest in for your long-term wealth creation.
The key is to stay consistent, use the right metric, and invest wisely.