One client recently asked me, Why does my mutual fund portfolio show 9% absolute returns, 21% XIRR, and a different CAGR?

Well, here’s the simplified difference

Absolute Returns – The total gain or loss on your investment without considering time. Its like looking at the start and finish of a race but ignoring how long it took.

CAGR (Compound Annual Gross Rate) - This shows the steady growth rate as if your investment grew at the same rate every year. Its ideal for comparing investment over a fixed period.

XIRR (Extended Internal Rate of Return) - This goes one step further it accounts for all the cash flow. (When you added or withdraw money) and calculates your actual annualized return, considering the time value of money.

For my client, the portfolio is absolute return was 9% (Start to finish growth) CAGR showed how the portfolio would have grown if it had compounded evenly over the holding period. But XIRR told the most accurate story, reflecting real return based on timing of their investments, which was 21%.

Each metric has its role, but XIRR often given the clearest picture when there are multiple transactions.

Are you looking at the right numbers when reviewing your investments?

Blog by Mr. Santosh G Akerkar for Educational and Knowledge purposes only.

Best Regards,
Santosh Akerkar