Understanding Annualized Return: CAGR and XIRR

Here is a 7-minute video that discusses the differences and similarities between the two types of annualized returns: the Compound Annual Growth Rate (CAGR) and the extended internal rate of return (XIRR).

An annualized return treats an investment in a volatile instrument (gold, stocks, debt funds) as one that compounds and calculates an average year-upon-year return. This enables easy comparison with the return from fixed income products like fixed deposits and bonds.

First the definition of an absolute return:

Absolute refers to growth without considering the investment time period. It is simply the percent difference in the money you had before investing and the money you have now.

current value = total investment x (1 + absolute return)

Absolute return = (value-investment)/investment = total gain/total investment.

The investment period is not taken into account.

A portal like money control only gives you absolute returns which is useless. Even for a SIP, it calculates return using the above formula.

Here is a screenshot from its portfolio tracker with the absolute returns marked by black rectangles.

Absolute returns

Always consider only annualized returns for measuring portfolio growth.

Annualized Return: CAGR  and XIRR

The XIRR illustrations are taken from these posts:

What is XIRR?

My take:

My exact XIRR as on date is 16.56%. Quantum says this is twice as much as bencmark returns. Too lazy to calculate net equity XIRR as I need to enter few transactions, but I am pretty sure QLTE is either an average or just above average performer in my folio. So I am going to continue investing in QLTE.

Also, regarding my investment strategy: I invest each month regardless of market levels. Sometimes, I change the amounts I invest in the funds. based on portfolio weights and performance. It is done without too much analysis.  I would like to reiterate that fund reviews should only be based on personal investment performance.

Calculating Returns from a Mutual Fund SIP

You can also try out this Internal Rate of Return -XIRR Calculator

Other links
What is CAGR – Compound Annual Growth Rate: Video

What is Compound Annual Growth Rate (CAGR)? Part I: Lump Sum Investing

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2 thoughts on “Understanding Annualized Return: CAGR and XIRR

  1. Hello pattu sir, There were some nice videos on interview with Uma Shashikant madam on Debt funds. can no longer find it here, can you please share it again. Thanks.

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