Tipping Point: How is XIRR different from CAGR?

Suppose you invested Rs 10 lakh in mutual funds in March 2011 and it became Rs 20 lakh by March 2017. The annualised rate of return on your investment is 12 per cent. This rate of return in a situation where you have one initial investment amount and one final amount is called compounded annual growth rate or CAGR. But typically an investor invests different amounts at several points of time. Now he wants a single number that will tell him how his investments, made at various points of time, have fared. Clearly, calculating the CAGR will not help. The XIRR, also known as the extended internal rate of return, can come to your aid in such a situation.

How does one calculate XIRR?

It can be calculated quite easily using the XIRR function in a spreadsheet software such as Microsoft Excel.