What Is CAGR in Mutual Funds: Meaning, Formula, and How to Calculate Your Returns

Realise that CAGR in mutual funds represents the "average annual rate" at which an investment would have grown to reach its final value from its initial investment (assuming the returns were compounded each year).

Mathematically, the CAGR calculation formula can be expressed as follows:

Where,

• EV = Ending value
• BV = Beginning value
• n = Number of years
   

Example: Calculation of CAGR in Mutual Funds

Suppose you invest ₹1,00,000 in a mutual fund. After 5 years, the investment grows to ₹1,48,670. Here,

• Beginning Value (BV) = ₹1,00,000
• Ending Value (EV) = ₹1,48,670
• Number of Years (n) = 5
   

Now, if we apply the formula: 

Interpretation? The investment delivered an CAGR of 8.20% over the five-year period. It does not mean the mutual fund earned exactly 8.20% every year. Instead, it indicates that the investment grew at an average compounded annual rate of 8.20%, even if the actual yearly returns were different.

XIRR (Extended Internal Rate of Return) is an annualised return metric that calculates the returns on investments involving multiple cash flows on different dates. It considers the amount + timing of every investment and withdrawal, potentially making it appropriate for various use-cases, such as:

• Systematic Investment Plans (SIPs)
• Systematic Withdrawal Plans (SWP)
• Additional lump sum investments, or
• Partial redemptions
   

The primary difference between CAGR vs XIRR lies in how they treat cash flows. CAGR assumes that a single investment is made at the beginning and remains invested until the end of the investment period. It only compares the initial investment value with the final value to calculate the annualised return.

In contrast, XIRR accounts for every cash flow separately and considers the exact date on which each transaction takes place. To gain more clarity, let’s check out the detailed comparison between CAGR vs XIRR:

So, now you know the CAGR meaning, its calculation formula, and how it differs from XIRR. If we were to revise, the CAGR full form is Compound Annual Growth Rate. It is a “point-to-point” return metric that calculates the average annual rate at which an investment would have grown from its beginning value to its ending value over a specific period, assuming the returns were compounded. 

The CAGR calculation formula is:

CAGR in mutual funds is potentially suited for evaluating one-time or lump-sum investments. In contrast, XIRR (Extended Internal Rate of Return) calculates the annualised return for investments involving multiple cash flows on different dates. Note that XIRR is usually calculated using spreadsheet software, such as Microsoft Excel or Google Sheets, through the XIRR function.

For more information, you can visit ww.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. What is a good CAGR for a mutual fund?

There is no universal CAGR that can be considered "good" for every mutual fund. An acceptable CAGR may depend on factors such as:

• The fund category
• Investment horizon
• Market conditions, and 
• Risk involved

As per general industry practice, instead of evaluating CAGR in isolation, several investors compare it with the fund's benchmark and peers over the same period.
 

2. CAGR vs XIRR: When Should You Use Each Return Metric? 

Potentially, CAGR is suited for evaluating the returns of a one-time or lump sum investment held over a specific period. In contrast, XIRR may be used when an investment involves multiple cash flows, such as SIPs, additional investments, or withdrawals.