Imagine this: You’re planting a magical money tree.
- Sometimes you plant a single seed (a lump sum investment).
- Other times, you add more seeds gradually (SIPs).
- And sometimes, you even harvest some of the fruits (withdrawals).
Now, you want to know how well your magical money tree is growing.
- CAGR (Compound Annual Growth Rate) is like looking at the first seed you planted and the final fruit you harvested. It tells you the average growth rate assuming you planted only that first seed and harvested only at the end.
- But CAGR ignores all the extra seeds you planted and the fruits you picked along the way.
That’s where XIRR (Extended Internal Rate of Return) comes in.
XIRR is like a magical magnifying glass that considers every single seed you planted and every fruit you harvested. It takes into account:
- When you planted each seed (investment date).
- How many seeds you planted each time (investment amount).
- When you harvested each fruit (withdrawal date).
- How many fruits you harvested each time (withdrawal amount).
XIRR gives you a more accurate picture of how well your money tree is truly growing. It shows you the overall average annual growth rate, considering all your planting and harvesting activities.
So, why is XIRR important for investors?
- It gives you a realistic view of your investment performance.
- It helps you compare different investment options accurately.
- It allows you to track the growth of your investments over time.
By using XIRR, you can make informed decisions about your investments and watch your money tree flourish!