What is XIRR in Mutual Funds and how is it different from CAGR?
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CAGR is the rate of return of the underlying investments, independent of your personal contributions or withdrawals. The CAGR over some period assumes money is deposited at the beginning of that period and no additional deposits or withdrawals occur.
XIRR is your personal rate of return, based on when make contributions or withdrawals. If you contribute money when the fund is down, you will end up with a higher XIRR than if you bought when the fund is up, all else equal.
XIRR (Extended Internal Rate of Return) is a financial metric used in the context of mutual funds to calculate the annualized return on investments, accounting for irregular cash flows such as investments and withdrawals made at different times. It considers the timing and amount of these transactions to provide a more accurate picture of an investment’s performance.
CAGR (Compound Annual Growth Rate), on the other hand, calculates the annual growth rate of an investment without considering the timing and value of individual transactions. It provides a smoothed, average return over a specified period. While CAGR is simpler to calculate, XIRR is more precise for investments with irregular cash flows, making it a better choice for evaluating the real-world performance of mutual funds.
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