Chapter 10 of 12
Measuring returns: CAGR, XIRR and rolling returns
8 min read
A return figure only means something if you know how it was measured. The same fund can look very different depending on the period and the method.
Absolute return
Absolute return is simply the total gain as a percentage of the amount invested. It ignores how long it took, so a 100% gain over three years and over thirty years look identical.
CAGR
Compound Annual Growth Rate converts a total gain into an annual rate, assuming steady growth. It works for a single lump-sum investment.
CAGR for a lump sum
- ₹1,00,000 grows to ₹2,00,000 in 6 years.
- The CAGR is about 12.2% a year.
- The money doubled, but the annual rate depends on how long it took.
XIRR for SIPs
A SIP puts money in at many different dates, so CAGR does not fit. XIRR works out a single annual return that accounts for each instalment's date and size. It is the figure to use when judging your own SIP.
Rolling returns
Point-to-point returns depend heavily on the start and end dates. Rolling returns calculate the return over many overlapping periods, say every three-year window across ten years. They show the range of outcomes an investor could have had, including the worst.
- Look at the average rolling return.
- Look at the worst result, and how often returns were negative.
- A fund with a slightly lower average but far fewer bad windows may suit you better.
Key takeaways
- Absolute return ignores time; CAGR fits lump sums; XIRR fits SIPs.
- Single-period returns depend on the dates chosen.
- Rolling returns show the spread of outcomes, not just one.
This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.