XIRR vs CAGR: Performance Metrics Explained

Discover how XIRR compares to CAGR and other performance metrics. Learn when to use XIRR judiciously and explore better alternatives for calculating investment returns.

Yusuf A

2/9/20253 min read


One of the most important things that an investor in concerned with is the amount of return on their investments. Investors in mutual funds also try to compare the returns of different mutual funds or other asset classes. The major difference with returns calculation for the mutual funds arises due to the systematic investment plans (SIPs). With SIPs small investment each month lead to different prices and different units allocated. This leads to inaccurate calculations using traditional absolute returns metrics such as the CAGR which assumes single periodic payments.



While IRR is a good measure for payments but it also assumes payments at equal intervals. Investments on the other hand can be erratic based on investor and market sentiments. Therefore, one of the best metrics which adjusts for both differing value of the payments as well as the differing time intervals between two successive payments is the XIRR.



XIRR vs CAGR

CAGR is the average annual growth rate for investment adjusted which assumes that any profits are reinvested at the end of the annual period. Now the issue that arises with the CAGR is that it cannot properly account for further investments or withdrawals from a portfolio. More so, the changes in portfolio value in the middle of periods leads to inaccurate calculations. This is where XIRR becomes more useful which is by overcoming these two major drawbacks of the CAGR.



XIRR vs IRR

While IRR adjusts for the amount of cash flows, it cannot adjust for mid period cash flows. For example, if the cash flow is received in middle of the period, XIRR and IRR will differ. This becomes helpful for mutual funds, because withdrawals or dividend reinvestments can happen anytime

XIRR Formula:

Similar to IRR, XIRR can be calculated using the NPV formulae and using hit and trial method to iteratively calculate for IRR as well as XIRR. This can be complex for calculating even IRR. XIRR will involve calculating IRR for each period and then adjusting them based on the length of investment. Therefore, to avoid this, we can use a simple spreadsheet formula for calculating XIRR.

=XIRR(cashflow_amounts, cashflow_dates, [rate_guess])

As an example we can use a cashflow sequence to calculate the XIRR using a a spreadsheet

=XIRR(B2:B8,A2:A8,0)

Steps to calculate XIRR in a spreadsheet/excel:

  1. Create a two-column array/table with the first column populated with dates of the cash-flows received due to transactions and the second column including the amounts transacted.

  2. We need to pay attention to the fact that the cash flows invested and received need different signs. Additional SIPs or withdrawals (SWPs) need to have differing signs too. One can get this info from their mutual fund or asset management company account.

  3. Using the XIRR formula (=XIRR(cashflow_amounts, cashflow_dates, [rate_guess]), we can calculate XIRR. The rate-guess is optional and usually takes a default value based on the spreadsheet being used.



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