When you look at mutual fund performance, you will see terms like CAGR, XIRR, and absolute returns. These numbers can be confusing, but understanding them is crucial to knowing how well your investments are really doing.
Absolute Returns: The Simplest Measure
Absolute return tells you the total percentage gain or loss on your investment, without considering time.
Formula: ((Current Value – Invested Amount) / Invested Amount) × 100
Example: You invested ₹1,00,000 and it is now worth ₹1,50,000. Your absolute return is 50%.
The problem? This does not tell you how long it took. A 50% return in 2 years is very different from 50% in 10 years.
CAGR: Annualised Growth Rate
CAGR (Compound Annual Growth Rate) tells you the rate at which your investment grew per year, assuming it grew at a steady rate.
Example: If you invested ₹1,00,000 and it became ₹1,50,000 in 3 years, the CAGR is approximately 14.47% per year.
CAGR is great for comparing lump sum investments over the same time periods. Most mutual fund fact sheets show 1-year, 3-year, and 5-year CAGR.
When to use CAGR: For lump sum investments where you put money in once and track its growth.
XIRR: The Real SIP Return
If you invest via SIP, CAGR does not give you the accurate picture because you are making multiple investments at different times. This is where XIRR (Extended Internal Rate of Return) comes in.
XIRR considers every individual SIP instalment and its date to calculate your actual annualised return.
Example: You run a SIP of ₹5,000 per month for 3 years. Each instalment enters the market on a different date and at a different NAV. XIRR calculates the single annualised return that accounts for all these different entry points.
When to use XIRR: For SIP investments or any investment with multiple cash flows at different dates.
Which Return Metric Should You Use?
- Absolute returns: Use for investments held less than 1 year
- CAGR: Use for lump sum investments held more than 1 year
- XIRR: Use for SIPs and investments with multiple transactions
Common Mistakes to Avoid
Mistake 1: Comparing absolute returns of funds held for different durations. A fund with 80% absolute return over 5 years may have performed worse than a fund with 40% return over 2 years.
Mistake 2: Using CAGR for SIP returns. CAGR assumes a single investment, so it understates your SIP returns when markets have been volatile.
Mistake 3: Ignoring the time period. A 25% CAGR over 1 year is less reliable than a 15% CAGR over 10 years.
How to Check Your Returns
On the Bachatt app, you can see your portfolio’s XIRR and absolute returns in real-time. Our dashboard breaks down performance for each fund and your overall portfolio, making it easy to track how your money is growing.
The Bottom Line
Do not get confused by return numbers. For your SIP investments, look at XIRR. For lump sum, look at CAGR. And always compare returns over similar time periods. With Bachatt, tracking your mutual fund performance is simple and transparent.
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