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Difference between XIRR, CAGR and Absolute Returns in Hindi | How to Calculate XIRR - YouTube
Channel: ET Money
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When you hear that the returns of
the fund for the past 5 years is 11%,
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then what does it mean?
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Does it mean that if you
had invested 5 years ago
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then you would have received a total
of 11% return or something else?
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And would you have received the same returns
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on both SIP and the one-time investment?
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If you get confused listening
about Mutual fund returns,
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then, you are not alone.
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It is a little difficult to
understand mutual funds returns.
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Most people get intimidated listening to heavy
words like CAGR, Absolute reuters, XIRR etc.
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But, this will not happen any more.
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In this video, we will tell you
about different types of mutual funds
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returns and will discuss how they
are different from each other.
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But before we begin - A quick reminder
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If you want to see more such videos
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then click on the subscribe button
and do press the notification bell
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so that whenever we upload a new video,
you receive a notification about it.
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Come, let’s begin.
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There is one important thing.
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All mutual fund returns -
whether it is CAGR or XIRR,
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tell about the historical aspects
meaning older returns of the fund.
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Through them, you get to know about the
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performance of the fund
during the chosen period.
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They are not the predictions for future returns.
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Also, in order to easily
understand all the returns,
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we will take the example
of Axis Bluechip Fund.
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First, let’s talk about CAGR.
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The full form of CAGR is
Compounded Annual Growth Rate.
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While discussing the performance of any fund,
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the most commonly used
return type is CAGR.
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CAGR tells you about the compounded growth
rate of your mutual fund investments.
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Come, let us understand this with an example.
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Mr, Vedant is a marketing
executive and he invested
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Rs 1 Lakh for 5 years in Axis
Bluechip Fund in the year 2015.
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On 22nd July 2015, he invested at 20.04 NAV
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and he was allotted 5000 units.
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Now, at the end of five
years, on 22nd July 2020 he
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redeemed his investments
and received Rs. 1,51,000.
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His investment increased by Rs. 51,000.
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But, what was the return
percentage earned by him and was
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this less than or more than
other investment options like FD?
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CAGR can help you understand this.
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Let’s see how it is calculated.
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In order to calculate the Compounded
Annual Growth Rate (CAGR) we need
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Initial Investment Value (IV), Final Investment
Value (FV) and period of investment (n).
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The formula to calculate CAGR is:
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CAGR = (Final Investment Value/Initial
Investment Value)^1/n – 1
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In the case of Mr. Vedant,
it will be calculated as follows:
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CAGR= (1,51,000/1,00,000)^⅕ – 1
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So, Mr. Vedant received an
average annual return of 8.5%.
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In this manner,
you can check the CAGR of different
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funds over 3, 7 and 10 years
of different time frames.
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So, next time when you hear or
know about the CAGR of a fund,
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then be understood that
this is the average annual
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returns that a fund has
generated over a time period.
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Before we move ahead, you should learn
some important things about CAGR.
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First, CAGR does not give you
a clear picture of volatility.
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Seeing this, you may feel that your
investment has had or had a linear growth.
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Which means that it has grown at
a fixed rate every year, however,
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the reality is that the value of the
investment may differ every year.
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For instance, looking at the 8.5%
CAGR growth in the above example,
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you may feel that the investment
of Mr. Vedant increased
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by 8.5% every year.
But this is not the reality.
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In order to understand it in a better
way, let’s see how
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Mr Vedant’s investment
performed on a yearly basis.
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As you can see, at the end of
the first year of investment,
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he earned a negative return of 0.35%.
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Going ahead, we can see that
in the second year his returns
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increased to touch 15.82% and
reached 21.66% by the third year.
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But the returns fell in 2019 and
he received returns of only 2.06%.
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As you can see, CAGR doesn’t
show the clear picture of the
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ups and downs that come to
the fund on an annual basis.
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It only gives us an overall picture.
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Second, though CAGR is the most used and popular
way to calculate the mutual fund returns,
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it has a limitation, that it doesn’t take
into account the periodic investments.
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In the example given above, if the investment
was made on different dates in the year,
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then, CAGR would not have been able
to give a correct picture of the returns.
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It is ideal for calculating returns
from a point-to-point basis.
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Therefore, CAGR is a correct method to calculate
returns for a one-time lump sum investment,
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but not to calculate
the SIP returns.
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So, the question arises that if
CAGR is not the correct method
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to measure the returns from
SIP investment then what is?
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XIRR is the solution for that.
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What is XIRR?
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CAGR is fine for lump sum investments,
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but places where there are
different cash inflows and
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outflows, like SIPS,
CAGR is not a good measure.
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That is because every installment
of an SIP is a new investment,
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therefore each amount is invested
for different time durations.
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For example, in a 5-year SIP, your first
installment will be invested for 5 years,
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the second installment for
4 years 11 months and so on.
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For this reason, every amount gets
compounded for different periods.
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The Extended Internal Rate of Return
(XIRR) takes this into account.
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In XIRR, CAGR is calculated for every
installment and then the overall
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Compounded Annual Growth Rate is taken
out after adding them all together.
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In order to understand this in a better
way, let’s once again take
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the example of Mr. Vedant who
invested in Axis Bluechip Fund.
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But this time, in place of
investing a lump sum he started a
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Rs. 5000 worth of monthly SIP
on 22nd July 2015 for 5 years.
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To keep it simple, let’s assume that
there was no redemption in between.
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So, now, Vedant would be investing
on different prices every month
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and every investment will remain
invested for different durations.
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This will have an impact
on their yearly returns and
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thus, there will be an impact
on their overall returns.
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Now, when the XIRR is calculated
next, then CAGR will be taken
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for every investment and then
all of them will be added.
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With this calculation, on investment through
SIPs, Vedant got yearly returns of 10.33%.
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When Vedant had invested in a lump sum,
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he received an average
annual return (CAGR) of 8.5%.
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But when he is investing through
SIP, we can see that
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he received an average annual
return (XIRR) of 10.33%.
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Now, if Vedand would have made one-off
investment or would have withdrawn some funds,
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then the XIRR would have been difficult.
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It happens like this
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because every cash flow is counted
while calculating XIRR returns.
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You can calculate the XIRR on excel
but we have made it much easier.
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You can see the SIP returns
of every fund for any
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amount and duration on the
scheme page of ETMONEY.
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So, till now we have
discussed the returns from
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mutual funds investments
held for more than a year.
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Now, you must be getting
the question that how to
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calculate the returns on
investments for a year or less?
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The answer to it is Absolute returns.
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What are Absolute returns?
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Absolute returns or Total returns means that
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how much you have gained
or lost in your investment.
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This is the easiest way to calculate returns
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In fact, we have all studied
about it in our school days.
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Come, let’s once again take the
example of investment of Mr. Vedant.
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At the end of the year 2019,
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the value of Mr. Vedant’s
investment was Rs. 1,43,600.
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And after a year, his investment
increased to become Rs. 1,51,000.
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His absolute returns would be:
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Absolute Returns = (Final Value –
Initial Value) / Initial Value * 100
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= (1,51,000-1,43,600/1,43,600)*100
= 5.19%
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In our example, the return figures given in
‘Year-on-Year Returns’ are the Absolute returns.
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It shows the exact returns delivered
by the fund in the previous year.
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Therefore, whenever you choose
an equity fund, then do not
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judge the fund with its
absolute or one year returns,
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but evaluate it on the basis of CAGR or XIRR
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meaning more than a year
(3/5/7/10 year’s returns).
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With this, we come to the end of this video.
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To invest for free in the 0% commission
direct plans of top mutual funds,
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download the ETMONEY app from the
link given in the description below.
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Until next time!!
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