What is the difference between CAGR and XIRR return, and how both are calculated?
- Atul Sachan
You can think of XIRR as nothing but an aggregation of multiple CAGRs. If you make multiple investments in a fund, you can use the XIRR formula to calculate your overall CAGR for all those investments taken together.
Let's understand it with the help of an example. Let's say you make investments of Rs 1,000 per month in a fund for a period of 12 months, which grow to Rs 50,000 in 5 years. What's your overall return on these 12 investment installments? To get the answer, you need to calculate the CAGR for 60 months on first installment, for 59 months on the second installment, for 58 months on the third one and so on and so forth. What XIRR does is that it aggregates all these CAGRs to give you the overall CAGR for all cash flows taken together. In our example, that comes out to be 10%.