CAGR, XIRR and absolute return — which number is lying to you
The same investment can honestly be described as 60% return, 10% CAGR or 14% XIRR. Knowing which applies stops you comparing incomparable things.
Three return numbers get quoted interchangeably. They measure different things, and mixing them up is how people end up believing one fund beat another when it did not.
Absolute return
(Final − Initial) ÷ Initial. You put in ₹1,00,000, it is now ₹1,60,000, that is 60%.
Useless on its own, because there is no time in it. 60% over two years is excellent. Over fifteen years it is poor. Any advertisement quoting an absolute return without a period is hiding the period on purpose.
CAGR — for a single lumpsum
The constant annual rate that would take you from start to end:
CAGR = (Final / Initial)^(1/years) − 1₹1,00,000 growing to ₹1,60,000 over 5 years is 9.86% CAGR.
CAGR smooths everything. A fund that went +50%, −30%, +40% has the same CAGR as one that crawled up steadily. Same destination, wildly different experience — and if you added money midway, wildly different actual outcome.
XIRR — for irregular cash flows
XIRR is the rate that makes the present value of every dated cash flow net to zero. It handles a monthly SIP, an extra ₹50,000 in March, and a withdrawal in year three, all at once.
For an SIP, XIRR is the honest number. A 12-month SIP totalling ₹60,000 that is now worth ₹64,000 is not a 6.7% return — the average instalment was invested for only about six months, so the annualised figure is closer to 13%.
Which to use
| Situation | Number |
|---|---|
| One lumpsum, one exit | CAGR |
| SIP, or any multiple contributions | XIRR |
| Comparing two funds | CAGR of the fund NAV, not your account |
| Judging your own outcome | XIRR of your account |
That last pair of rows matters. A fund's published CAGR is what the fund did. Your XIRR is what you got — and they differ because of when you bought and when you stopped.
Work out the CAGR
The trick to watch for
Point-to-point CAGR is enormously sensitive to the endpoints. A fund can advertise a spectacular five-year CAGR simply because five years ago happened to be a market bottom. Rolling returns — the CAGR across every possible start date — remove that flattery, which is exactly why they are quoted less often.
Published by FinClamp. This guide is information, not financial advice — see the disclaimer.