What is XIRR in Mutual Funds and how is it different from CAGR?
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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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