Level 2 · Module 2 · Products
CAGR, XIRR & Real Returns
Three ways to measure returns, and the one number advertisements never show.
In this lesson
What you'll be able to do
- Use CAGR correctly
- Know when XIRR is the right measure
- Adjust returns for inflation and tax
Think about it
Your investment doubled in six years. Is that a 100% return or a 12% return? Both answers are correct.
Story
Let's picture it
100% is the absolute return over the whole period. About 12.2% is the CAGR, the smoothed annual rate that would produce that doubling. Marketing loves absolute returns because the number looks larger. Learning to convert instantly is a small skill with a large defensive value.
Visual
Which measure when
Absolute return
Total % gain, ignores time, only useful with a stated period
CAGR
One investment, one entry, one exit
XIRR
Multiple cashflows at different dates, the right one for SIPs
Real return
After subtracting inflation
Post-tax real return
What actually reaches your pocket
Plain English
The simple explanation
CAGR smooths a multi-year journey into one annual rate. It hides the bumps along the way, useful for comparison, not for describing the ride.
For SIPs, CAGR is wrong because each instalment was invested for a different length of time. XIRR handles irregular dated cashflows and is what fund statements use.
Finally, subtract inflation and applicable tax. A 10% return with 6% inflation and tax on gains is a much smaller real gain than the headline suggests.
Real world
Fund factsheets
SEBI-mandated factsheets show returns across 1, 3, 5 and 10 years with a standard disclaimer. Reading the longer columns, and comparing against the scheme's benchmark, is far more informative than the one-year number.
Watch out
Common mistakes
- Using CAGR on a SIP
- Comparing a 1-year return to a 10-year CAGR
- Forgetting tax and inflation entirely
Did you know?
XIRR is a built-in spreadsheet function: give it dated cashflows (investments negative, redemption positive) and it returns the annualised rate.
Your turn
Mini challenge
Export any investment statement into a spreadsheet and run XIRR on it. Compare the answer to the advertised return.
Quick quiz
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Wrap up
Summary
CAGR for single investments, XIRR for SIPs, and always finish by subtracting inflation and tax.
- CAGR = smoothed annual rate
- XIRR = right tool for dated cashflows
- Headline returns are pre-inflation and pre-tax
Revise