What are Absolute Returns, CAGR and XIRR?

Absolute Returns (or Total Returns): it is the gain or loss you’ve made on your investment over any given period of time. Investors should not be looking at the absolute returns when investing in Mutual funds. 

Absolute Returns = (Final Value – Initial Value) / Initial Value * 100

CAGR or Compounded Average Growth Rate: it is the rate of return that would be required for an investment to grow from its initial investment to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan, hence taking into consideration the effect of compounding. Since it takes into consideration the investment tenure, it describes the rate at which your investment would have grown if it had grown the same rate every year. CAGR can be used to compare the historical returns of bonds, stocks or mutual funds. CAGR calculations are best suited for those who do single lumpsum investments. 

CAGR = (Final Value / Initial Value) ^ 1/n – 1 

IRR or Internal Rate of Return: it is a metric used to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. The higher the IRR, the more desirable is the investment. IRR calculations assume that the cash flow investments are even throughout the investment period. IRR calculations are best suited for investors who invest via regular SIPs.

XIRR or Extended IRR: is used when the cash flows into the investment are uneven and can happen at varied intervals.  Think of XIRR as your personal rate of return.  At Glide Invest, we consider this to be the best measure of the return on your investment.  It accounts for all lumpsum and SIP purchases and partial or full withdrawal of units in your fund, no matter when they are placed or of what value, and calculates the annual returns you are making in that investment from inception. 

CAGR uses only a beginning and ending value to provide an estimated annual rate of return. However, IRR (or XIRR) involves multiple periodic cash flows - reflecting the fact that cash inflows and outflows can occur at any time when it comes to investments.

Note: Where Mutual Funds are concerned, these returns are historical returns and depict only the past performance of the fund for the selected period. They do not guarantee the future performance of the fund. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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