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What is the difference between XIRR vs CAGR in portfolio returns?


What’s the difference between XIRR and CAGR in the portfolio return calculations?

XIRR is simply an Internal Rate of Return. (We’ll get to the X part later). CAGR is the Compounded Annual Growth Rate. They are different things, because the CAGR tells you how your investment has done on its own. XIRR tells you how your investment timeline, in terms of when you put in money and when you took out money, gave you an overall return.

This sounds complex. But it’s quite simple really.

The Compounded Annual Growth Rate

Let’s say you have a big amount of money. A lump-sum, say 10 lakh. You invest that into stocks. And it grows. You sell a little and use that money to buy other stocks. Whatever dividends come in, you use it to buy more stocks. And it grows, slowly, to Rs. 20 lakh in six years.

Your money doubled in six years. This is a 12% return per year. (Compounded)

This is a Compounded Annual Growth Rate. A CAGR. You put in money at one time, and that’s how much the portfolio grew.

You will compare this 12% return to the return of a mutual fund manager. This is how the fund growth is evaluated – the change between two NAVs (Net Asset Values) at two different dates, suitably annualized, is the “CAGR” of the Fund. So you have a 3 year CAGR (now minus 3 years ago, annualized)

But hardly anyone does anything like this. You don’t put money just one time. You put money every month. Every month, you buy a little more. You might call it an “SIP”. Or just a regular investment. But you don’t buy at one shot, you buy every month.

What’s your return now? It’s complex. If you invested Rs. 50,000 per month for two years, and stopped, then didn’t invest more for four more years. At the end you are at Rs. 18 lakh, your return is – what?

You invested 12 lakh. (24 x 50,000) It is now 18 lakh. So you made Rs. 6 lakh in profit. That is 50% in say 6 years. Does that mean your return is about 8% a year? (50/6)

Enter the XIRR

This is the Internal Rate of Return. We’ll get to the “X” later.

It accounts for cash flows. You put 50,000 in month 1. It’s invested for 6 years. You put Rs. 50,000 in month 2, it’s invested for 5 years 11 months. And so on for each installment of Rs. 50,000 for 24 months. If you use a single rate of return for each installment, how much would that get you?

An XIRR would tell you how much return you actually got. For example at 6% such a cash flow would earn you Rs. 16.11 lakh. Too low, your portfolio is now worth 18 lakh. So you try 7%. That gave you a cash flow of Rs.16.89 lakh. Not big enough. You keep trying until you reach the answer: 8.34%.

That’s your XIRR. This is YOUR return. It’s not the same as the underlying portfolio CAGR, which is likely to be different.

Forget that, show me an example: Capitalmind Momentum Portfolio

We have done it all. We started the new Momentum portfolio in 2016 November. We bought in four tranches. Each tranche was about 1.4 lakh. Then, we rejigged stocks every month. How do we get the portfolio’s return? Till now?

First, the Investment Valuation. The portfolio plot looks like this:
What is the difference between XIRR vs CAGR in portfolio returns?
This is of no use. You can’t use this bumpy chart. It has the cash flows as big “upjumps”. One for each tranche. So we adjust this curve. How?

We calculate the daily return for this portfolio. If you add more cash (buy another tranche) we back it out for that day. So when we bought the second tranche of Rs. 1.4 lakh, that day’s data would show a much higher number than for the earlier month. So we remove 1.4 lakh from that day’s number, and keep the daily return noted. This gives us a smooth equity curve. And here’s how the return curve (arrived at through the daily return method).

What is the difference between XIRR vs CAGR in portfolio returns?
This is the return of the portfolio. No matter when you bought into this portfolio, you made the return curve after that point. If you bought on 21/12/2016 your return was 40% since then. If you bought in Feb 2017, you got in at 115 (a 15% return from start) and now it’s 140 (40% return) which to your portfolio is a return of 21%+.

(To be fair, this is pretty good as a return, but we digress.)

This one isn’t compounded or annualized. The portfolio has only been around about 6 months. If we annualized a 10 day return of 5% we would get some ridiculous annual return of 350%+. Even higher if you assume 10 day compounding.

That makes no sense. So you compound only after a year (assuming profits are reinvested after one year). And you look at annualized returns only after you’re invested about one year or more.

However this is how the CAGR is calculated – you just annualize point to point returns on the absolute return graph.

And here’s how the portfolio works in terms of XIRR. You invested in four months (Nov, Dec, Jan, Feb). You got back money today. An amount of Rs. 7.74 lakh.

This is how your XIRR is, today:
What is the difference between XIRR vs CAGR in portfolio returns?
The formula is in Excel (or online spreadsheets). You get the annualized return for these “cash flows”.

Note: This is why the “X” before the IRR. It’s a rate of return but for irregular cash flows. The distance between the dates is not uniform. So we use an XIRR to calculate this.

101.8% was for today. What was it yesterday? The day before? And so on?

We calculated them and show them to you in a graph:
What is the difference between XIRR vs CAGR in portfolio returns?

As you can see this isn’t moving up. But that makes sense. If I want to make 30% i don’t want to start with 1% and keep going up to 30%. I want the return to be stable at 30% as much as possible.

Of course, markets are volatile, so XIRR will at some point go up and then down. As we move on to longer terms, the XIRR will stabilize.

Let’s now say you invested in the same portfolio but only did two tranches. Your XIRR would be different. But your CAGR would be the same (the upper curve, but after you invested)


When you want to find out how much your money has made for you, you want to use an XIRR. If you invest in tranches, life gets complicated. You can’t just say I invested Rs. 1000 a month for five years, and now I’m at Rs. 100,000 so I have 66% return. The CAGR here doesn’t make sense because you invested at different times. The XIRR of the cash flows will help you.

(Btw, It’s fine to say it when you’ve only invested for six months – the time value of money isn’t so apparent)

When you evaluate a fund’s performance you will use it’s CAGR. The curve of the NAV over time tells you how stable the fund’s return is. The CAGR for multiple periods tells you the same thing. The fund manager’s prowess comes into play in a CAGR calculation.

When you evaluate your own performance, you will use XIRR. If you invested in a fund over 5 years, with investments done every month (an SIP), you will need to use XIRR to evaluate what you would have made.

What about Dividends?

Dividends are cash flow out. Into your bank account. If you reinvest them, then don’t bother recording anything. (it’s like I took out Rs. 100 and put back Rs. 100, so there’s no point)

If you don’t reinvest them, they are cash flow out (kind of like selling and taking money out). Record these appropriately.

Buybacks are also cash flow out unless you reinvest.

Rights issues are fresh investments.

The idea is simple: Your returns are based on how much you put in and when. And how much you take out and when. And always, the last entry assumes you take out everything today, to give you the return picture.

Maintaining Your Own Portfolio

Create an excel sheet containing the following:
Date, Cash Flow, Portfolio Value

Every month (not every day) put the total amount of money you put in (or took out) from your investment portfolio in that month. And put the current portfolio value. Next month, add a new row.

The months return is simply your current month’s portfolio value minus cash flows in this month, as a percentage return from the previous month’s portfolio value. (Ignore previous month’s cash flows).

Check this online spreadsheet to see a sample.

This, over time, will give you your own XIRR. (And CAGR too). It’s just a bunch of calculations you make. The portfolio’s inner strength is the CAGR – how well your stock selection did etc. Your money management abilities – adding or removing cash – is then going to be valued through your XIRR.

And you need to look at both, over time, to see how well you’re doing.

Sometimes understanding how much you made is more important than the process of investment itself!

Of course, it feels better to just say: Hey, Avanti Feeds is now a 100% return in the Momentum portfolio! This is nice, but the real value is in know how well EVERYTHING has done. For that, we need the four letter words: XIRR and CAGR.

Are there pitfalls in XIRR or CAGR?

CAGR has problems:

  • It doesn’t tell you what you have done. Some people stop their SIP after a downturn. The market may then come back after a few months. A mutual fund with NAV of 100 could fall to 70, then come back to 140 in a year. The CAGR will still be 40%.
  • But if you had Rs. 50 in the beginning, and were supposed to add Rs. 50, what if you didn’t, because you got scared when it hit 70?
  • You now have 50 in cash since you didn’t invest. The earlier 50 became Rs. 70. For a total of Rs. 120.
  • The CAGR was 40%, but you only have 120 because you refused to invest when the market was down. Your return is 20%.
  • CAGR is therefore how the underlying market has done, and this may not be in your control.

XIRR has problems:

  • It overemphasis certain cash flows.
  • Same example above – the market is at 100, falls to 70 and goes up to 140.
  • You put in Rs. 50 first. Then, you put in Rs. 5000 in the last day of the year, when the market was 140.
  • Your XIRR will be horribly small, because the growth in the Rs. 50 is overshadowed by the fact that you added Rs. 5,000 when the market was very high.

CAGR is the underlying market (or fund manager’s) return, and XIRR is your asset allocation or cash flow based return. You might need both just to see how well you’ve done.



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