Market Volatility & The US-Iran Conflict: Is Your Mutual Fund Metric Misleading You?

If you find yourself in a state of constant back and forth when making investment decisions linked to mutual funds, especially in the backdrop of the increasing volatility and uncertainties in the equity market, have a look at which return metrics could help you make a wiser choice.

While evaluating mutual funds, most investors only look at return percentage, the key metrics to look at are CAGR (Compounded Annual Growth Rate), XIRR (Extended Internal Rate of Return), and Rolling Returns.

CAGR, XIRR or Rolling Returns?: Which Return Metric To Look At

Compounded annual growth rate (CAGR) indicates how much your investment grows in a fixed period at an average annual rate. It proves useful when you have made a lump sum investment and folded it for a specific time period.

However, the limitation with CAGR is that your money has been invested at the same time which is not true in real life.

On the other hand, XIRR is relevant when you invest in multiple installments like SIP. It considers the investments made on different dates and tells you the overall return. In simple words, if you are an SIP investor, XIRR gives you a realistic picture.

Also Read: Goldman Sachs Slashes Oil Forecast To $90 After US-Iran Ceasefire

Lastly, rolling returns shows how consistently the fund performed in different time periods.

If you look at five-year rolling returns, then its helps one understand how the fund performed in any 5-year period. This matrix is especially useful to evaluate consistency.

Let's take a look at all three metrics together: 

CAGR is the average return of a fixed period. XIRR is the average return of a fixed period. XIRR is the actual investor experience especially in SIP.

Rolling returns are the consistency of performance over time. If you look at CAGR alone, you will not get the full picture. XIRR alone does not give you the idea of consistency.

So the better approach is to combine these three metrics to understand how much return the fund gave, how it gave and how much consistency, according to Kotak Neo.