The CAGR Helps frame an investment's return over a certain period of time. It has its benefits, but there are definite limitations that investors need to be aware of. With multiple cash flows, the IRR or XIRR approach is usually considered to be better than CAGR.
In other words, AAGR is a linear measure, whereas CAGR factors in compounding and “smoothens” the growth rate. For the most part, AAGR is viewed as a simpler, less informative measure because the metric neglects the effects of compounding, a crucial consideration in the context of investing and portfolio management.
Which is better, XIRR vs CAGR? It depends on the type of investment. For investments with regular cash flows, such as lump sum investments, CAGR is a good enough measure of returns. However, for investments with irregular cash flows, such as SIPs, XIRR is a better measure of returns.
Both CAGR and absolute returns are considered valuable metrics when it comes to evaluating investment performance, but the key difference lies in their approach to time. Generally, CAGR is a preferred metric for longer-term investments.
Internal Rate of Return (IRR)
IRR is useful when cash is added or withdrawn at different times, like in real estate or project financing. Unlike CAGR, it takes into account uneven cash flows and the timing of when money comes in and goes out. IRR usually requires software like Excel to calculate.
If your MF investments are through SIP, you need XIRR to calculate the returns as the mutual fund units and investment period vary significantly over time. Absolute return refers to the actual increase or decrease in the value of the investment over a specific period, expressed as a percentage.
It is great to get a XIRR of around 20%. However it is to be noted that this has been possible due to strong bull run post COVID fall. For a long period of 15 years we typically make a modest assumption of 12% return to account for drawdowns and sideways market situations.
You may consider CAGR of around 5%-10% in sales revenue to be good for a company. CAGR is used to forecast the growth potential of a company. For a Company with a track record of over five years, you may consider a CAGR of 10%-20% to be good for sales.
Disadvantage of CAGR: Smoothing and Risk
One disadvantage of the Compound Annual Growth Rate is that it assumes growth to be constant throughout the investment's time horizon. This smoothing mechanism may yield results that differ from the actual situation with a highly volatile investment.
The rule of 70 is used to determine the number of years it takes for a variable to double by dividing the number 70 by the variable's growth rate. The rule of 70 is generally used to determine how long it would take for an investment to double given the annual rate of return.
AAGR helps determine long-term trends. It is a metric that's commonly used to assess the performance of investments, businesses, and economies over several years. AAGR tells us the mean annualized rate of growth of the subject.
There isn't a one-size-fits-all answer, but generally, an IRR of around 5% to 10% might be considered good for very low-risk investments, an IRR in the range of 10% to 15% is common for moderate-risk investments, and in investments with higher risk, such as early-stage startups, investors might look for an IRR higher ...
The Excel RRI function is frequently used to calculate an investment's compound annual growth rate (CAGR), which measures the growth of an investment as if its value had steadily grown at a consistent rate on an annualized basis, including the effects of compounding.
If you double your money in 1 year, that's a 100% IRR. Invest $100 and get back $200 in 1 year, and you've just earned 100% of what you put in. If you double your money in 2 years, you need to earn *roughly* 50% per year to get there.
The company is often compared to an investment fund; between 1965, when Buffett gained control of the company, and 2023, the company's shareholder returns amounted to a compound annual growth rate (CAGR) of 19.8% compared to a 10.2% CAGR for the S&P 500.
A CAGR in sales of 5-12 per cent is suitable for large-cap companies. Similarly, for small businesses, a CAGR of 15% to 30% is satisfactory. Furthermore, a company's CAGR must be consistent over time. As a result, a promising CAGR does not always imply the highest CAGR; it can also mean stable and constant growth.
By investing in a mutual fund that gives 15% annual returns, you can outpace inflation and preserve the value of your money. For example, if the inflation rate is 6%, your Rs. 1,000 today will be worth only Rs. 174.11 after 20 years.
In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.
XIRR meaning
It is a single rate of return applicable for every SIP instalment and redemption. XIRR in mutual funds gives the annual average return for each SIP instalment. Unlike CAGR, it accounts for irregular cash flows and multiple periods, making it an essential tool for analysing mutual fund returns.
What does XIRR of 10% mean? An XIRR of 10% signifies the average annualized return generated by an investment over its entire period, considering both inflows and outflows of cash, which amounts to 10% annually. Is 100% XIRR good? A 100% XIRR indicates that the investment has doubled in value annually on average.
Bonds or debt funds that invest in bonds are linked closely to interest rates in the economy, which works closely with the inflation rates. If inflation rises, interest rates rise. Interest rates and bond prices move in opposite directions. Hence bond prices will fall in this case.