September 13, 2012 4:33 pm
IS IRR(internal Rate of Return) and CAGR one and the same? if different when IRR should be used and CAGR should be used ?
We make investments to earn returns. Return is the gain or loss in the value of an asset in a particular period.It is usually quoted as a percentage. The general rule is that the more risk you take, the greater the potential for higher return – and loss
There are various kinds of returns:
Absolute return or Point to Point Returns
Average Annual Return (AAR)
Compound Annual Growth Rate or CAGR
Typically a simple point-to-point return is preferred when the holding period is less than one year and CAGR is ideal for longer holding periods – invest once and on maturity find the return.
For multiple investments over period of time one needs to use IRR or XIRR
Our article Understanding Returns: Absolute return, CAGR, IRR etc explains the concept in detail
Dear SEthu, in asense IRR & CAGR are both same. Generally IRR is used where you are depositing some amount regularly & in between you are getting some money back also. So it’s for a series of cash in/outflow. Whereas CAGR is normally used for continuous investment & getting a final maturity value.
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