{"id":3116,"date":"2025-03-04T15:58:57","date_gmt":"2025-03-04T10:28:57","guid":{"rendered":"https:\/\/www.torusdigital.com\/toruscope\/?p=3116"},"modified":"2025-04-01T13:35:30","modified_gmt":"2025-04-01T08:05:30","slug":"difference-between-xirr-vs-cagr","status":"publish","type":"post","link":"https:\/\/www.torusdigital.com\/toruscope\/mutual-funds\/difference-between-xirr-vs-cagr\/","title":{"rendered":"XIRR Vs CAGR: Which is the Better Way to Compare Mutual Funds?"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_section el_id=&#8221;blog-inner-layout&#8221;][vc_row overlay_dotted=&#8221;&#8221;][vc_column el_class=&#8221;blog_primary&#8221;][vc_row_inner][vc_column_inner][vc_column_text css=&#8221;&#8221;]Evaluating and comparing mutual funds are vital steps of the investment process. By looking at the past performance of different mutual funds within the same category, you can choose a scheme that has a proven track record and consistently higher performance than its peers. This ensures your investment is on track with your financial goals.<\/p>\n<p>CAGR and XIRR are two of the most commonly used financial metrics to gauge the performance of a mutual fund. To make an objective decision, you should understand what these terms mean as well as the differences between <strong>XIRR vs CAGR<\/strong> in our detailed guide.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"CAGR_Meaning_in_Mutual_Funds\"><\/span>CAGR Meaning in Mutual Funds<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Compound Annual Growth Rate (CAGR) is a relatively simple metric used to measure the annualised growth of any investment, such as mutual funds or stocks. For a mutual fund, it shows the rate at which the investment has grown over a specific period. It provides a relatively clear picture of how the fund value has risen over time when cash flows happen at regular intervals.<\/p>\n<p>The CAGR is a standardised metric used to compare the average performance of different mutual funds over a given time. It is useful in showcasing the rate of growth or decline of an investment over a certain period, such as 3 years or 10 years. Fund houses often show the 1-year, 3-year and 5-year CAGR of their mutual funds on their websites.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Calculate_CAGR_for_a_Mutual_Fund\"><\/span>How to Calculate CAGR for a Mutual Fund?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As mentioned before, CAGR shows the average growth rate on average over a certain time. The formula to calculate this is as follows:<br \/>\nCAGR = [(FV \/ P) ^ (1\/n)] \u2013 1<br \/>\nWhere FV is the final investment value, P is the principal investment amount, and n is the number of years of investment.<br \/>\nSuppose you invest \u20b915,000 in a mutual fund, and your investment grows to \u20b925,000 in 5 years. The CAGR at which the fund grows is:<br \/>\nCAGR = [(25,000 \/ 15,000) ^ (0.2) \u2013 1] = 10.75%<br \/>\nThis means that your mutual fund has grown annually by 10.75% on average for 5 years.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Pros_and_Cons_of_Using_CAGR_for_Mutual_Funds\"><\/span>Pros and Cons of Using CAGR for Mutual Funds<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To compare <strong>CAGR vs XIRR<\/strong>, we must first compare the benefits and limitations of CAGR in assessing mutual fund returns.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Pros\"><\/span>Pros<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>CAGR is a very easy metric to calculate as it uses a simple formula that anyone can apply without requiring any tool.<\/li>\n<li>As it shows the average returns over a certain period without the use of any complex metrics, it gives a clear long-term perspective.<\/li>\n<li>You can use the CAGR metric to compare different investments. With CAGR, you can compare the performance of different types of mutual funds, multiple funds within the same category or against a particular benchmark.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Cons\"><\/span>Cons<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>As a result of its simplicity, CAGR can be a misleading performance metric.<\/li>\n<li>It does not show accurate returns when you make multiple investments within a specific period. This makes it a poor metric for calculating SIP (systematic investment plan) returns.<\/li>\n<li>As it assumes a steady rate of return, looking at the CAGR does not tell you how volatile a mutual fund is.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"XIRR_Meaning_in_Mutual_Funds\"><\/span>XIRR Meaning in Mutual Funds<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Extended Internal Rate of Returns (XIRR) is the average annualised returns of an investment calculated by taking into account its different cash inflows and outflows. Basically, it measures the internal rate of return after accounting for individual cash flows based on their specific dates.<\/p>\n<p>Internal Rate of Return (IRR) is the annualised rate of return from a series of cash flows based on the discounted cash flow (DCF) method. Cash flows are discounted at a certain rate based on the present value of the investment; if cash flows happen earlier, they are discounted less and more if they happen later. This concept is called the time value of money, i.e., the value of money lowers over time.<\/p>\n<p>XIRR is, thus, a more flexible version of IRR that accounts for irregular cash flows. As a result, it accounts for inflows via SIPs and lump sums as well as outflows via redemptions, dividends, systematic withdrawal plans (SWP), and more.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Calculate_XIRR_for_a_Mutual_Fund\"><\/span>How to Calculate XIRR for a Mutual Fund?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When comparing <strong>CAGR vs XIRR<\/strong>, you should know that you can&#8217;t calculate XIRR using a simple formula. Instead, you must write down the series of cash flows, including investments and withdrawals, in one row\/column and the dates of each instalment in the other row\/column in an MS Excel spreadsheet. Then, you can use the following formula to calculate the XIRR:<\/p>\n<p>=XIRR(values, dates, [guess])<\/p>\n<p>Where &#8216;values&#8217; is the total amount invested (minus sign for withdrawals), &#8216;dates&#8217; is the corresponding date of each instalment in any recognised format and &#8216;guess&#8217; is an optional number close to the XIRR result (can be left blank).<\/p>\n<p>Let\u2019s say you write down the instalment dates in Column C from Row 10 to 20 and cash flows in Column D next to each date in an Excel spreadsheet. The formula you should enter in the Formula Box will be \u201c=XIRR(C10:C20, D10:20).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Pros_and_Cons_of_XIRR_for_Mutual_Funds\"><\/span>Pros and Cons of XIRR for Mutual Funds<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Before we look into the <strong>differences between CAGR and XIRR<\/strong>, let\u2019s check the benefits and limitations of XIRR.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Pros-2\"><\/span>Pros<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>It\u2019s a more versatile tool for measuring different types of investments as it accounts for both inflows and outflows in its calculation.<\/li>\n<li>The XIRR provides a useful reflection of an entire portfolio as it takes into account multiple transactions, including lumpsum and SIP investments, SWPs, dividends, partial redemptions, etc.<\/li>\n<li>It works well when the investment has varying rates of return or no fixed holding period.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Cons-2\"><\/span>Cons<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>It\u2019s complex to calculate and requires the use of a spreadsheet. You have to plot the accurate date and details of each transaction over your selected time frame, which is time-consuming.<\/li>\n<li>XIRR is a sensitive metric, and even minor alterations can change the final results.<\/li>\n<li>The Excel formula for XIRR assumes that subsequent cash flows have the same time interval. If this does not happen, the results could be inaccurate.<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What_are_the_Differences_between_XIRR_and_CAGR\"><\/span>What are the Differences between XIRR and CAGR?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Here is a table highlighting the differences between XIRR vs CAGR to help you understand when to use each option:<\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Aspect\u00a0<\/b><\/td>\n<td><b>CAGR<\/b><\/td>\n<td><b>XIRR\u00a0<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Definition<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Annualised rate of return over a certain period\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Internal rate of return over a specific period based on individual cash flows<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Timing of Investments<\/span><\/td>\n<td><span style=\"font-weight: 400;\">The total time of investment<\/span><\/td>\n<td><span style=\"font-weight: 400;\">The exact timing of each transaction<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Types of Cash Flows Considered\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Considers a single initial investment\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Multiple, irregular cash flows\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Accuracy\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Lower for irregular investments<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Higher for irregular cash flows\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Better Suitable for\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Single, long-term investment\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Multiple investments and cash flows\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Investment Type\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Only lump sum investments\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Lump sum, SIP, SWP, partial redemption, full withdrawal, etc.\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Calculation\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Uses a single formula\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">It requires the use of a spreadsheet\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Complexity\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Less complex\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">More complex\u00a0<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span class=\"ez-toc-section\" id=\"XIRR_vs_CAGR_%E2%80%93_How_do_they_Compare\"><\/span>XIRR vs CAGR \u2013 How do they Compare?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>CAGR is a common tool for comparing the returns of different types of investments. It is typically used when comparing mutual funds with regular cash flows, as it assumes a constant rate of return. It&#8217;s also useful for long-term analysis as it provides a simplified measure of average returns. Anyone can calculate the CAGR of a mutual fund with a standard calculator.<\/p>\n<p>XIRR measures the average returns after taking into account periodic cash flows. This can include both inflows from SIPs and lump sums and withdrawals, whether systematic or lump sum, at different points in time. This provides a more accurate picture of investment returns. However, the calculation process is more complex.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Final_Words\"><\/span>Final Words<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In short, both XIRR and CAGR are useful tools in assessing mutual fund performance. However, when comparing the applicability and differences between <strong>XIRR vs CAGR<\/strong>, the former is better for investments with irregular cash flows, while the latter is better for regular investments. CAGR is also better for long-term investment analysis, while XIRR is better for analysing returns in the short term.[\/vc_column_text][\/vc_column_inner][\/vc_row_inner][vc_row_inner el_id=&#8221;share_rating&#8221;][vc_column_inner width=&#8221;1\/2&#8243;][vc_column_text css=&#8221;&#8221;]<\/p>\n<h6>Rate this article<\/h6>\n<!-- FeedbackWP Plugin --><div  class=\"rmp-widgets-container rmp-wp-plugin rmp-main-container js-rmp-widgets-container js-rmp-widgets-container--3116 \"  data-post-id=\"3116\">    <!-- Rating widget -->  <div class=\"rmp-rating-widget js-rmp-rating-widget\">            <div class=\"rmp-rating-widget__icons\">      <ul class=\"rmp-rating-widget__icons-list js-rmp-rating-icons-list\">                  <li class=\"rmp-rating-widget__icons-list__icon js-rmp-rating-item\" data-descriptive-rating=\"Terrible!\" data-value=\"1\">              <i class=\"js-rmp-rating-icon rmp-icon rmp-icon--ratings rmp-icon--star \"><\/i>          <\/li>                  <li class=\"rmp-rating-widget__icons-list__icon js-rmp-rating-item\" data-descriptive-rating=\"Bad!\" data-value=\"2\">              <i class=\"js-rmp-rating-icon rmp-icon rmp-icon--ratings rmp-icon--star \"><\/i>          <\/li>                  <li class=\"rmp-rating-widget__icons-list__icon js-rmp-rating-item\" data-descriptive-rating=\"Okay!\" data-value=\"3\">              <i class=\"js-rmp-rating-icon rmp-icon rmp-icon--ratings rmp-icon--star \"><\/i>          <\/li>                  <li class=\"rmp-rating-widget__icons-list__icon js-rmp-rating-item\" data-descriptive-rating=\"Good!\" data-value=\"4\">              <i class=\"js-rmp-rating-icon rmp-icon rmp-icon--ratings rmp-icon--star \"><\/i>          <\/li>                  <li class=\"rmp-rating-widget__icons-list__icon js-rmp-rating-item\" data-descriptive-rating=\"Great!\" data-value=\"5\">              <i class=\"js-rmp-rating-icon rmp-icon rmp-icon--ratings rmp-icon--star \"><\/i>          <\/li>              <\/ul>    <\/div>    <p class=\"rmp-rating-widget__hover-text js-rmp-hover-text\"><\/p>    <button class=\"rmp-rating-widget__submit-btn rmp-btn js-submit-rating-btn\">      Submit Rating    <\/button>    <p class=\"rmp-rating-widget__results js-rmp-results rmp-rating-widget__results--hidden\">       <span class=\"rmp-rating-widget__results__rating js-rmp-avg-rating\">0<\/span> \/ 5.  <span class=\"rmp-rating-widget__results__votes js-rmp-vote-count\">0<\/span>    <\/p>    <p class=\"rmp-rating-widget__not-rated js-rmp-not-rated \">          <\/p>    <p class=\"rmp-rating-widget__msg js-rmp-msg\"><\/p>  <\/div>  <!--Structured data -->        <\/div>\n<div id=\"emoji-overlay\" style=\"display: none;\">\n<div id=\"overlay-emoji\"><\/div>\n<div id=\"overlay-description\" class=\"emoji-text\"><\/div>\n<\/div>\n<div id=\"rating-popup\">\n<p><span id=\"popup-close\">\u00d7<\/span><\/p>\n<div class=\"popup_message\">\n<div id=\"popup-emoji\"><\/div>\n<div class=\"popup_innermsg\">\n<h5>Thank You for Rating Our Article!<\/h5>\n<p>Your feedback is incredibly valuable to us, and we&#8217;re thrilled to hear your thoughts.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p>[\/vc_column_text][\/vc_column_inner][vc_column_inner width=&#8221;1\/2&#8243;][vc_column_text css=&#8221;&#8221;]<\/p>\n<h6>Share this article<\/h6>\n<div class=\"cscra-social square cscra-socials-679c8a1122c00\">\n        <a href=\"\/\/www.facebook.com\/sharer\/sharer.php?u=https%3A%2F%2Fwww.torusdigital.com%2Ftoruscope%2Fmutual-funds%2Fdifference-between-xirr-vs-cagr%2F&t=XIRR+Vs+CAGR%3A+Which+is+the+Better+Way+to+Compare+Mutual+Funds%3F\" class=\"facebook\" data-toggle=\"tooltip\" data-placement=\"top\" title=\"Share On Facebook\" target=\"_blank\"><i class=\"fa fa-facebook\"><\/i><\/a>\n        <a href=\"\/\/twitter.com\/intent\/tweet?text=XIRR+Vs+CAGR%3A+Which+is+the+Better+Way+to+Compare+Mutual+Funds%3F&url=https%3A%2F%2Fwww.torusdigital.com%2Ftoruscope%2Fmutual-funds%2Fdifference-between-xirr-vs-cagr%2F\" class=\"twitter\" data-toggle=\"tooltip\" data-placement=\"top\" title=\"Share On Twitter\" target=\"_blank\"><i class=\"fa-brands fa-x-twitter\"><\/i><\/a>\n        <a href=\"https:\/\/api.whatsapp.com\/send?text=XIRR+Vs+CAGR%3A+Which+is+the+Better+Way+to+Compare+Mutual+Funds%3F - 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On the other hand, CAGR only accounts for investment growth over a specific period, which is not appropriate for SIPs.[\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;Is annualised return the same as CAGR?&#8221; tab_id=&#8221;1741084133247-2a4cfc81-fdd1&#8243;][vc_column_text css=&#8221;&#8221;]CAGR and annualised total returns are almost the same as both calculate the average returns over a given period and are often used interchangeably. However, they have a small point of difference. CAGR uses the beginning and ending values for an investment while the total number of years is used to calculate annualised returns. [\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;Is it possible to convert XIRR to CAGR?&#8221; tab_id=&#8221;1741084264816-a99716aa-062d&#8221;][vc_column_text css=&#8221;&#8221;]No, direct conversion from XIRR to CAGR is not feasible due to the different methods used for their calculations. While one is based on cash flow and timing, the other is based on the total investment period and profits made.[\/vc_column_text][\/vc_tta_section][vc_tta_section title=&#8221;Which is the better metric \u2013 CAGR or absolute return?&#8221; tab_id=&#8221;1741084286999-7d3f4375-0a0b&#8221;][vc_column_text css=&#8221;&#8221;]Absolute return is a simpler metric which can be more useful when calculating returns for less than a year. For all other applications, the CAGR is generally the more useful metric. [\/vc_column_text][\/vc_tta_section][\/vc_tta_accordion][\/vc_column][\/vc_row][\/vc_section][vc_row][vc_column][vc_column_text][\/vc_column_text][\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"[vc_section el_id=&#8221;blog-inner-layout&#8221;][vc_row overlay_dotted=&#8221;&#8221;][vc_column el_class=&#8221;blog_primary&#8221;][vc_row_inner][vc_column_inner][vc_column_text css=&#8221;&#8221;]Evaluating and comparing mutual funds are vital steps of the investment process. By looking at the past performance of different mutual funds within the same category, you can choose a scheme that has a proven track record and consistently higher performance than its peers. This ensures your investment is on track","protected":false},"author":1,"featured_media":4636,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_sitemap_exclude":false,"_sitemap_priority":"","_sitemap_frequency":"","footnotes":""},"categories":[4],"tags":[],"class_list":["post-3116","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mutual-funds"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>XIRR vs CAGR: Meaning, Formula, Differences and Which is Better<\/title>\n<meta name=\"description\" content=\"CAGR and XIRR are two essential mutual fund performance metrics you can use to compare funds. 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