As a mutual fund director, we are always very excited about the returns of mutual funds. But you may come across many such terms related to Mutual Fund returns that can confuse you such as CAGR, XIRR and Absolute Returns.

When you are investing in a mutual fund through SIP, it becomes more difficult for you to find out the exact return of the mutual fund because the investments in SIP are done at different time intervals.

It is essential for you to have proper knowledge of all these return terms so that you can calculate your mutual fund returns correctly.

## What is CAGR (What is CAGR in Mutual Funds)

CAGR is the most commonly used term in both stock market and mutual funds. The full form of CAGR is Compound Annual Growth Rate.

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CAGR reflects the compound growth on your mutual fund. It tells you the average annual growth rate at which your portfolio has grown over a given period of time.

In the calculation of CAGR returns, it is assumed that whatever profit you are earning on your investment is reinvested. The rate of CAGR is annual.

If understood in very simple language, CAGR tells that at what annual average rate your investment has grown from beginning to end. Here the annual average rate means that one year the return was 10%, the next year 20%, so here the annual average rate for two years would be 15%.

Let us understand CAGR with the help of an example –

Let's assume Mr. Vikas has invested one lakh in SBI Bluechip Fund. If after 5 years this one lakh becomes ₹ 1.50 lakh, then here the CAGR will be –

CAGR = (1,50,000 1,00,000)∧1/5 – 1 = 8.45%

Here 8.45% CAGR means that this investment is growing at an average rate of 8.45% per annum.

### CAGR Formula

The CAGR return is calculated with the help of the following formula –

CAGR = (Final Value / Initial Investment Value) 1/t – 1

You can do direct CAGR calculation of any investment from here.

## Limitations of CAGR

CAGR is widely used to calculate mutual fund returns. But you also need to keep in mind its limitations.

(i) CAGR returns do not give you an idea of market volatility. Looking at the rate of CAGR, a new investor can feel that his investment will increase every year at the rate of CAGR. But it didn't happen.

In the above example Mr. Vikas is getting an annualized return of 8.45% for 5 years but these returns are not the same but vary for each year

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These returns with a CAGR of 8.45% can also be like this –In this table you see that these investments are growing at different rate every year but the average CAGR of 5 years is 8.45%.

Year | Initial Investment | Current Investment value | CAGR |

1st Year | ₹1,00,000 | ₹1,03,000 | 3% |

2nd Year | ₹1,03,000 | ₹1,00,980 | -1.96% |

3rd Year | ₹1,00,980 | ₹1,17,050 | 15.91% |

4th Year | ₹1,17,050 | ₹1,16,090 | -1.82% |

5th Year | ₹1,16,090 | ₹1,50,000 | 29.21% |

Let's say you have invested ₹ 1,00,000 for only 3 years, then the CAGR for 3 years here will be 5.39% only.

Thus, CAGR tells you the overall picture of returns and not the performance of the fund in various market conditions.

(ii) CAGR is the best way to measure the returns of stock market and mutual fund lump sum investment.

But the CAGR does not prove to be correct for additional investments which have been made at different time intervals. CAGR is best for such investments which are made one time. But CAGR for SIP does not give the correct picture.

Now let's talk about which method can be used to measure SIP returns. The best option to measure SIP returns is XIRR.

## What is XIRR (What is XIRR in Mutual Funds)

CAGR is the best way to calculate the annual return of lump sum investment. But for an investment in which there is cash inflow and cash outflow at different times, XIRR is used.

In XIRR investments made through SIP, the returns are calculated keeping in mind the transactions like STP and SWP.

The full form of XIRR is Extended Internal Rate of Return. In the case of Mutual Fund SIP, each SIP investment stays invested for a different period of time.

For example, if you have done a SIP for 10 years, then its first investment will be invested for 10 years, second for 9 years 11 months, third for 9 years 10 months and so on.

In this, each of the installations is invested for a different period of time. Therefore, it becomes necessary to calculate the returns by correctly knowing the time period of each investment.

Let's say Mr. Vijay started a monthly SIP of ₹5,000 in SBI Bluechip Fund 5 years ago. After 5 years the total investment will be Rs.3 lakhs which will be valued at Rs.4.90 lakhs as on date. During this five year investment, Mr. Vijay's XIRR return stood at 19.75.

If Mr. If Vijay had invested Rs 3 lakh in lump sum 5 years ago, his value would have become Rs 5.89 lakh today. The CAGR of this investment during this period would have been 14.43%.

In this way, XIRR in SIP while CAGR in Lum Sum is the best option.

It is worth noting here that both XIRR and CAGR are annual. It simply means that if the CAGR of a fund is 12%, then that fund is making 12% return for one year.

## XIRR for Stocks

In the stock market, if you have invested in any stock at different times or are doing SIP in any stock, then XIRR can be used for such investment.

XIRR Calculation

You can calculate this rate with the help of Excel –

Note down the dates of your periodic investments in a column.

In the second column, write the amount of your investment. If there is cash outflow then write the amount in negative and if there is cash inflow then write in positive.

In the last column, write the amount of redemption or the current value of your investment.

After this you apply this formula =XIRR(Select all figures of amount column, Select all dates) × 100

After entering the formula, press enter. You will get the XIRR of your investment.

## What are the differences between XIRR and IRR?

IRR is the internal rate of return. This formula is used when you invest only once in a year. Monthly investment is not considered in IRR.

If you calculate your SIP through IRR only, then it assumes that each of your SIP installments has been invested for a year. Time is not considered in this rate.

Whereas in XIRR time is also taken into account. If any of your investments have been invested for only 6 months in a year, then XIRR will consider it as invested only for 6 months.

The same IRR would consider it an investment for the entire 12 months, which would have been wrong.

So if your investments are made at different times of the year then XIRR would be the best option for you.

## What is Absolute Return?

## Absolute Return for SIP

Date | SIP Amount | Current Value |

1January | ₹5,000 | ₹4,950 |

1 February | ₹5,000 | ₹10,350 |

1March | ₹5,000 | ₹18,100 |

1Aprial | ₹5,000 | ₹20,900 |

Redemption 1 à¤®à¤ˆ | ₹21,000 | |

total investment | ₹20,000 | ₹2,500 (the profit) |

Absolute Return | (₹1000 / ₹20,000) ×100 =5% | |

XIRR Returns | 26.66% |