When evaluating mutual fund performance, two key metrics are often used, XIRR (Extended Internal Rate of Return) and CAGR (Compound Annual Growth Rate). Both play significant roles in helping investors understand the returns on their investments, but they serve different purposes. Understanding these metrics is crucial for making informed investment decisions. In this blog, we will explain what is XIRR, what is CAGR, differences between XIRR vs CAGR and help you decide the better method to calculate mutual fund returns.
What is XIRR?
XIRR stands for Extended Internal Rate of Return. It is a more flexible method of calculating returns, particularly useful for investments with multiple cash flows, such as Systematic Investment Plans (SIPs), lump sum investments, and withdrawals made at irregular intervals.
Also read: 10 Mutual Funds That Doubled Wealth In 5 Years
Key Features of XIRR
- Handles Multiple Cash Flows: XIRR accounts for different investment dates, amounts, and withdrawals, making it ideal for SIPs or non-linear investments.
- Annualized Returns: XIRR converts returns into an annual percentage rate, giving investors a comparable way to evaluate performance.
- Versatile: It can handle complex situations like partial redemptions or additional investments, giving a more accurate representation of real returns.
Example of XIRR Calculation: If you invest ₹10,000 monthly in a mutual fund for 12 months and redeem the total value after one year, XIRR will consider all your individual investments and calculate the return accordingly.
Also read: Best Equity Mutual Funds for NRIs to Invest in 2024
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It provides a consistent, annualized rate of return over a specific period, assuming a single investment with no intermediate cash flows.
Also read: NAV in Mutual Funds: Definition, Formula, Example & its Role
Key Features of CAGR
- Straightforward Calculation: CAGR calculates the average annual return, assuming the investment grows at a constant rate.
- Ideal for Lump Sum Investments: Since it doesn’t account for multiple cash flows, CAGR is best suited for lump sum investments over a fixed period.
- Long-Term Performance Indicator: CAGR is often used to assess the long-term performance of an investment, like a mutual fund over 5 or 10 years.
Example of CAGR Calculation: If you invest ₹1,00,000 in a mutual fund and it grows to ₹1,50,000 after three years, the CAGR will show the annual growth rate over that period.
Also read: What is the 15x15x15 Rule In Mutual Funds for NRIs?
Key Differences between XIRR vs CAGR
| Parameter | XIRR | CAGR |
| Cash Flows | Handles multiple, irregular cash flows | Only works with a single, lump sum investment |
| Accuracy | More accurate for SIPs or varied investments | Works best for consistent, lump sum investments |
| Flexibility | Accounts for additional investments or withdrawals | Assumes no intermediate cash flows |
| Usability | Complex but versatile | Simple and easy to calculate |
| Investment Type | Ideal for SIPs and non-linear investments | Ideal for lump sum investments |
Which is the Better Way to Calculate Mutual Fund Returns: XIRR vs CAGR?
The best method depends on the type of investment you’ve made.
- For SIPs and Investments with Multiple Cash Flows: XIRR is the clear winner because it accurately accounts for varying cash flows over time. SIP investors benefit from using XIRR to get a real sense of their portfolio’s performance.
- For Lump Sum Investments: CAGR is more suitable as it provides a clear and easy way to calculate the annualized return over a fixed period without intermediate cash flows.
In many cases, mutual fund investors use both XIRR and CAGR, depending on the type of investment. XIRR gives a better real-world picture for SIPs, while CAGR simplifies the calculation for lump sum investments.
Also read: Best SIP for NRI to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs
How to Invest in Mutual Funds as NRI/OCI?
Investing in mutual funds as an NRI has a slightly different procedure than that of residents. For that, you need a NRO/NRE account and Mutual Fund KYC to start your SIP investment in Indian mutual funds. Furthermore, certain regulations of the FEMA Act need to be adhered to as an NRI investor in mutual funds. This is a prime reason why NRIs from the US and Canada can only invest in a few mutual fund schemes whereas NRIs from other countries can choose to invest in a variety of mutual fund schemes. To know more about NRI mutual fund investment procedure, steps, and rules, please refer here.
That being said, once your documentation and procedures are done, you can start investing in mutual fund SIPs with ease. There are more than 2000+ mutual fund schemes available for NRIs to choose from where they can invest either in SIP or lump sum as per their preference.
Also read: Step-by-Step Guide for NRIs to Pick a Winning Mutual Fund
Wrapping Up
Both XIRR and CAGR are essential tools for measuring mutual fund returns, but each serves a different purpose. If you are investing via SIPs or making irregular investments, XIRR will give you a more accurate picture of your returns. On the other hand, if you have made a lump sum investment, CAGR is the way to go. Understanding XIRR vs CAGR and when to use each method will help you evaluate your mutual fund performance more effectively and make better investment decisions.
Invest in NRI Mutual Funds with SBNRI
NRIs can now download the SBNRI App and choose to invest in best SIP for NRI mutual fund schemes in India with ease. You can also get detailed mutual fund advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
Can XIRR be used for lump sum investments?
Yes, but CAGR is generally preferred for simplicity in lump sum investments.
Is XIRR always higher than CAGR?
Not necessarily. XIRR can be higher, lower, or equal depending on the timing of cash flows and the performance of the investment.
What should I use for SIPs?
XIRR is the best method for calculating SIP returns as it takes into account multiple cash flows.
Which method is more accurate for long-term investments?
Both methods are accurate, but XIRR is better for tracking irregular cash flows over time, while CAGR is perfect for lump sum, long-term investments.
Why might my XIRR be negative even if my investment value has increased?
A negative XIRR can occur if the timing and amount of your cash flows result in a net outflow over the investment period. It’s essential to consider all cash inflows and outflows when interpreting XIRR to understand the actual performance.
Is it possible for CAGR and XIRR to yield the same result?
Yes, if you make a single lump sum investment with no additional cash flows or withdrawals, both CAGR and XIRR will provide the same annualized return, since there’s no variability in cash flows to account for.
Which method is better for comparing different mutual funds?
For lump sum investments, CAGR is sufficient for comparison. However, if you’re investing through SIPs or have irregular investments, using XIRR will give a more accurate comparison of mutual fund performance by considering the timing of your cash flows.
