When you hear that the returns of a mutual fund for the past years are 15%, what does it mean? Does it mean that if you had invested 5 years ago, you would have earned 11% returns on your investment or something else? And would you have received the same returns on both lump sum and SIP investments? If you invest in mutual funds, it is important to understand the various terms related to mutual fund returns. The terms CAGR, IRR, and XIRR meaning may seem heavy jargon, but once you understand them, you can make informed decisions on your mutual fund investments.
Mutual funds are one of the most popular investment options for individuals looking to grow their wealth over a period of time. It is suitable for those who do not have enough time to research individual stocks and track the market regularly. In this article, we will learn about the meaning of CAGR, IRR, and XIRR, including what they measure, how they are calculated, and why they are important.
The mutual fund helps you to grow your wealth in the long term.
Table of Contents
What is CAGR?
CAGR is the most used and popular way to calculate mutual fund returns. CAGR stands for Compound Annual Growth Rate. This metric calculates the average annual growth rate for an investment over a given period. It is calculated by taking the total returns of an investment during a given period and dividing it by the average amount invested during that period.
- The formula for calculating the compound annual growth rate (CAGR)=(End Value / Start Value)^(1 / Number of Years) – 1
- For example, if you invest Rs. 1,000 in a mutual fund and receive a return of 10% per year, your CAGR would be 10%.
One thing you need to keep in mind is that CAGR is not offering any clarity on volatility. Seeing this, you may find that your investment has had or had linear growth, which indicates there is a growth at a fixed rate every year. However, in reality, your investment value may vary from year to year. Also, CAGR does not count periodic investments.
What is IRR?
IRR stands for Internal Rate of Return. It is the rate at which the business can generate its returns. For example, the IRR of a fund is 12%. In this case, if you invest Rs. 100 in a fund, you will be able to generate Rs. 112 by the end of the year.
IRR takes the average rate of return and computes it over a while, considering the amount invested on each occasion. This metric is often used to evaluate the profitability of a project and is often used in business when making capital investment decisions. It is often used to compare the performance of mutual funds, especially when looking at short-term returns. The IRR calculation is often used to find the best mutual funds at any given time.
The formula for calculating the internal rate of return IRR= (End Value / Start Value)^(1 / Number of Years) – 1
What is XIRR meaning?
If you want to calculate return over some time when you invest monthly or quarterly, you need to use XIRR.
XIRR meaning, Excess Internal Rate of Return. This metric is similar to IRR, with a few key differences. While IRR is used to rank different investments, XIRR is used to evaluate the returns of an investment. IRR is computed over time, taking into account the amount of money invested at different points during that time. XIRR, on the other hand, takes into account the amount of money you initially invested and all the additional money you invested during that period. This metric is primarily used by institutions that manage mutual funds and is less commonly used by individual investors.
Formula to calculate XIRR = IRR(values, dates, [guess])
Mutual funds are the most suitable investment options for a beginner investor.
Differences between CAGR, IRR & XIRR meaning
|CAGR is calculated by taking the total returns of an investment during a given period and dividing it by the average amount invested during that period.||IRR is calculated by taking the average rate of return and computing it over a period of time, taking into account the amount invested on each occasion.||XIRR meaning, it is calculated by taking the initial amount invested, adding in all additional money invested during the period, and dividing it by the average amount invested.|
|CAGR is useful for comparing the performance of different investments over the same period.||IRR can be helpful for investors who are looking for investments with quick payouts.||XIRR meaning- it is a more accurate measure of an investment’s performance.|
|CAGR is usually used to measure the growth of a mutual fund or other investment stocks for one year.||IRR calculates the yield or earnings generated from an investment over a particular time frame.||XIRR meaning- It allows investors to compare different investments with varying payment frequencies (e.g monthly, quarterly, annually).|
|CAGR is calculated based on the initial and final value of the investment, and the number of years it was held.||IRR is calculated based on the cash flows of the investment and the discount rate used to determine the present value of those cash flows.||XIRR meaning-, It is calculated based on the cash flows of the investment and the discount rate used to determine the present value of those cash flows.|
|A fund with a higher CAGR will typically outperform other funds over the long term.||A higher IRR means that the fund is generating more money than it’s spending.||A higher XIRR meaning is that the fund is generating good returns.|
|Since CAGR does not take into account the periodic or SIP investments. It is a good measure for lump sum investment.||IRR is used when you invest in a mutual fund through SIP.||XIRR is used when you invest in a mutual fund through SIP.|
Mutual funds are an excellent investment vehicle for individuals looking to grow their wealth over time. So, it is important to understand the difference between CAGR, IRR, and XIRR meaning when investing in mutual funds. One important thing you need to remember is that all mutual fund returns- whether it is CAGR or XIRR, mention the historical aspects of the fund, and it doesn’t guarantee to give you the same returns in the future. So, do good research and analysis before investing in a mutual fund.