Portfolio review: Should you look at CAGR, XIRR or rolling returns?

When reviewing your mutual fund investment portfolio, it is easy to get lost in numbers and jargon. Metrics like Compound Annual Growth Rate (CAGR), Extended Internal Rate of Return (XIRR), and rolling returns can give you different perspectives on your returns, but each serves a unique purpose. Understanding what they reveal and which one matters most for your goals, can help you make informed decisions and track your portfolio’s performance effectively.

Compound Annual Growth Rate (CAGR)

Extended Internal Rate of Return (XIRR)

XIRR takes into account the timing and amount of all cash flows during the investment period. XIRR is particularly useful for measuring the performance of mutual funds that involve periodic investments or redemptions, such as Systematic Investment Plan (SIP) investments.

XIRR considers each instalment in an SIP a new investment, along with the total time for which it was invested.

For example, if you invested in a 10-year monthly SIP, your first instalment was invested for 10 years, second for 9 years, 11 months, and so on. So, each SIP amount is compounded for a different period.

XIRR calculates the compounded annual growth rate (CAGR) of each SIP and then adds all these together to give one overall compounded rate.

What investors should look at while reviewing their portfolio?

"To review a portfolio meaningfully, you need to look beyond a single return number to understand the performance of the portfolio from different angles. CAGR shows how your one-time or lump sum investment grew annually over a fixed period of time, assuming you invested once and never touched it. But it will ignore multiple cash flows like SIP every month or withdrawals in between," said Shweta Shastri, who is a certified Financial Planner.

"CAGR/XIRR is something which investors should look at while reviewing their portfolio. This gives them an understanding of how much return they made per annum, since the time they started investing in that particular scheme," said Ronak Morjaria, Partner at ValueCurve Financial Services.

If you have invested lumpsum then CAGR. If you have invested via SIP then XIRR, added Ronak.

"If you want to understand, what did you actually earn considering all the cashflows at different time intervals then XIRR (Extended rate of return) gives you the correct number for your portfolio performance. XIRR gives you the internal rate of return of your portfolio," said Shweta Shastri.

Rolling returns

Rolling returns are a way to measure an investment’s performance over many overlapping time periods, rather than just one fixed period.

Rolling returns show you what returns an investor would have earned over every possible time period. Instead of just checking “7-year returns ending today,” rolling returns show you the returns for every 7 years over the past decade.

When should investors look at rolling returns?

"Rolling returns should be looked for in the scheme selection of your portfolio. One should also look at it before you decide to exit/stop SIPs in an underperforming scheme," said Ronak Morjaria.

"But if you want to see how consistently your portfolio is generating returns considering Risk across market cycles, then you should consider rolling returns. This will ensure whether the performance is sustainable or just a result of favourable timing.so in short, rolling return builds confidence," said Shweta.

So, all three returns should be considered while reviewing one’s portfolio, where the primary focus should be on rolling returns to judge consistency across market cycles, then XIRR to know the actual return earned based on real cash flows & lastly, CAGR should be used only as a secondary measure to understand long-term growth capability, not decision-making.