CAGR, IRR, XIRR, Absolute return – I am confused?
As an investor in Mutual Funds, we all come across these terms, very often.
What it means?
Which one to use?
Which one is the best?
Let’s simplify…
CAGR; stands for “Compounded Annual Growth Rate”, and works on a compounding formula, based on a single transaction. Usually CAGR is used for estimating future returns, based on historic returns or assumptions, for a time range.
IRR; stands for “Internal Rate of Returns”, and used for calculating returns for multiple transactions, which are equally spaced in time (past or future). Usually IRR is used for calculating returns for SIP transactions.
XIRR; stands for “Extended IRR”, like above, only difference being, when your transactions are not equally spaced in time. For instance, calculating returns for transactions, which may include SIP, Lumpsum, STP, SWP, etc.Absolute returns; refers to the amount of funds (gain or loss), that an investment has earned, over a period of time. Also referred as the “Total Return”, the “Absolute Return” measures the gain or loss experienced by an asset or portfolio.