Mutual Fund Returns Explained: CAGR, XIRR, and Absolute Returns
When you invest in mutual funds, you’ll often see terms like CAGR, XIRR, and Absolute Return used to describe performance.
But what do these terms really mean?
Understanding how mutual fund returns are calculated helps you evaluate fund performance accurately and make smarter investment decisions.
Understanding Different Types of Mutual Fund Returns
1. Absolute Return
Definition:
Absolute return shows how much your investment has grown in total — without considering time.
Formula:
Absolute Return (%)=((Initial Value – Current Value)/ Initial Value) × 100
Example:
If you invested ₹1,00,000 in a mutual fund, and it grows to ₹1,20,000 after 2 years,
then:
((1,20,000 – 1,00,000) / 1,00,000) x 100 = 20%
Your absolute return is 20%.
When to Use:
- Ideal for short-term investments (less than a year).
- Best suited for lump-sum investments.
- Does not account for how long the investment was held.
2. CAGR (Compound Annual Growth Rate)
Definition:
CAGR shows the annualized growth rate of your investment, assuming it grows at a steady pace every year — even though in reality, returns fluctuate.
Formula:
CAGR = (Final Value/Initial Value)^(1/n) – 1
where n = number of years.
Example:
If ₹1,00,000 becomes ₹1,44,000 in 3 years,
CAGR = (1,44,000 / 1,00,000)^{1/3} – 1 = 12.99%
So, your investment grew at an average annual rate of 13%.
When to Use:
- Best for lump-sum investments held for multiple years.
- Helps compare performance across funds or asset classes.
- Reflects annualized growth over time.
3. XIRR (Extended Internal Rate of Return)
Definition:
XIRR is used when multiple investments or withdrawals happen at different times — such as SIPs (Systematic Investment Plans).
It takes into account the time value of money, making it the most accurate measure for SIP returns.
Example:
Suppose you invest ₹10,000 every month for 12 months (₹1,20,000 total), and your total value after a year is ₹1,28,000.
The XIRR function (available in Excel or mutual fund statements) calculates your effective annual return based on all cash flows.
When to Use:
- Ideal for SIP or recurring investments.
- Captures irregular cash flows and their timings.
- Gives a true picture of your actual return.
Comparison Summary
| Return Type | Best For | Considers Time? | Ideal Example |
|---|---|---|---|
| Absolute Return | Short-term, lump-sum | ❌ No | 6-month investment |
| CAGR | Long-term, lump-sum | ✅ Yes | 5-year investment |
| XIRR | SIPs, multiple transactions | ✅ Yes | Monthly SIP over years |
Why Understanding These Matters
Many investors only look at the final value of their portfolio — but that doesn’t tell the full story.
Knowing which return metric applies to your investment style helps you evaluate performance fairly and choose the right mutual fund.
For example:
- A SIP investor should always focus on XIRR, not CAGR.
- A lump-sum investor comparing 5-year returns should use CAGR.
Key Takeaways
- Absolute return = total growth, time ignored.
- CAGR = average annualized return, suitable for long-term lumpsum.
- XIRR = real return considering SIP dates and amounts.
- Always use the right return metric for accurate comparison.
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