# Measuring Mutual Fund Returns – CAGR, XIRR & Absolute Returns

What is the first question that you ask when investing in a mutual fund scheme? ‘Kitna returns milega? Mutual fund return is the most important factor that investors look at while investing. And rightly so. You are after all investing your hard-earned money. So, you have every right to know what kind of mutual fund returns to expect. But unfortunately, majority of investors fail to understand the various types of mutual fund returns. This failure is the reason why investors are often misled and mis-sold mutual fund schemes. But we are going to change this. There are numerous types of returns but only 3 types of mutual fund return matter to you as an investor – CAGR, XIRR & Absolute returns. We all know that if you invest Rs 100 in a mutual fund and it becomes Rs 150, then Rs 50 is your profit or mutual fund return. Simple! Well, not really. Mutual fund returns are a little bit more complex. For example: If your friend, advisor or uncle tells you that this XYZ fund has given a 30% return, the question that you should be asking is – ‘What kind of mutual fund return is this? Absolute? CAGR? Or XIRR?’ Let us start with Absolute returns.

### Absolute returns

Absolute return is the most common type of mutual fund return. It is also the most mis-leading mutual fund return. This is because it does not consider the time taken to earn the return. For example: Suppose a person tells you that they walked 20 kms. You’d think this is quite impressive. But what if this person walked 20 kms in 20 days? This means that he only walked for 1 km a day! This is way less impressive. This is how absolute return is absolutely misleading! Let us now compare two mutual fund schemes via absolute returns. Suppose you have two investment opportunities.
• You can invest Rs 1 lakh in Fund A and get Rs 1.50 lakhs. Or,
• You can invest Rs 1 Lakh in Fund B and earn Rs 1.45 Lakhs.
You will obviously select Fund A. And absolute return will support your decision. Here’s how. The formula to calculate absolute returns = (Maturity Value – Investment Value)/Investment Value. Absolute return for Fund A = (1,50,000-1,00,000)/1,00,000 = 50% Absolute return for Fund B = (1,45,000-1,00,000)/1,00,000 = 45% By simply looking at absolute return, you will conclude that your decision was correct. But what if we add an element of ‘time’ into this. Will you still choose fund A? To answer this, we need to look at another type of mutual fund return – Compounded Annual Growth Rate (CAGR).

### Compounded Annual Growth Rate (CAGR)

 SIP Dates SIP amount Months Invested For 01-01-20 -5,000 12 01-02-20 -5,000 11 01-03-20 -5,000 10 01-04-20 -5,000 9 01-05-20 -5,000 8 01-06-20 -5,000 7 01-07-20 -5,000 6 01-08-20 -5,000 5 01-09-20 -5,000 4 01-10-20 -5,000 3 01-11-20 -5,000 2 01-12-20 -5,000 1 01-01-21 65,000 0 XIRR 15.66%
As you can see, in reality your returns are 15.66%! not 8.33%. This difference is because your 1st instalment had 12 months to grow. But your 5th instalment had only 7 months to grow. Similarly, the last instalment had only 1 month to grow! XIRR helps you calculate point to point mutual fund returns. Remember, the best way to calculate your SIP returns is through XIRR.

### Final Thoughts

Learning about all these mutual fund returns might be a little overwhelming. So, let’s make it easier for you to remember.
• Whenever you are analysing an investment opportunity, always use CAGR instead of absolute returns.
• Use CAGR to calculate returns on lumpsum investment
• Use XIRR to calculate returns on Systematic Investment Plan