The above 3 terms we see often when we look for return history of a fund. How these measures differ from each other and at what context they are to be used? (We will not discuss any formula here, just plain understanding of the terms)
Say 5 years back two funds' NFOs got opened - fund A and fund B - at NAV 10. Now after 5 years say both funds' NAV stands at 20. What is compounded annualised return (CAGR) here?
Simple. Use 'rate' function in Excel. Remember CAGR is not per year return or not average return. It is compounded annualised growth rate. So CAGR is not going to be 20% but somewhere near 15%. So both funds' CAGR will be same. Fine.
Now there could be two different scenarios -
1) Say, fund A's NAV stayed most of the time close to 10 - 12 and sometime even below 10 and then suddenly in last 1 quarter it's NAV suddenly spiked up and reached 15. Whereas fund B's NAV grew at a regular fashion throughout this 5 years. Though both fund's CAGR shows here the same number but which one is a better performer? Ofcourse Fund B!
Rolling Return will help us here to find out which fund is a more consistent performer.
2) If there are intermediate transactions in between this 5 years, CAGR will not reflect those. What could be intermediate transactions? Those could be dividend payouts, partial withdrawals or additional investments etc.
XIRR will consider such transactions and shows us the right figure to compare both funds' performances in such cases.
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