CAGR vs IRR: What's the Difference?
Two popular return metrics, explained with examples
CAGR and IRR are both used to measure investment performance, but they work best in different situations. CAGR is simple and good for start-to-end comparisons. IRR is more advanced and accounts for the timing of cash flows.
| Metric | Description | Best For |
|---|---|---|
| CAGR | Smoothed annualized growth rate assuming compounding. | Long-term investment performance with no intermediate cash flows. |
| Simple Average Return | Arithmetic mean of annual returns. | Quick rough estimates only. |
| Absolute Return | Total percentage change from start to end. | Short-term or single-period performance. |
| IRR | Discount rate that makes the net present value of all cash flows zero. | Investments with multiple inflows and outflows. |
| TWR | Removes the impact of external cash flows. | Evaluating fund manager performance. |
What Is CAGR?
CAGR measures the annualized growth of an investment from a starting value to an ending value, assuming no intermediate cash flows. It smooths out volatility and gives a single growth rate.
What Is IRR?
IRR is the annualized rate of return at which the net present value of all cash flows equals zero. It accounts for the timing and size of each cash flow.
Use IRR for projects, real estate investments, private equity, or any investment with irregular contributions and withdrawals.
Same Investment, Different Results
You buy a stock for $10,000, receive $2,000 in dividends at the end of each year for 4 years, and sell it for $12,000 at the end of year 4.
CAGR Calculation
CAGR only uses the purchase price ($10,000) and the sale price ($12,000) over 4 years: CAGR = (12,000/10,000)^(1/4) - 1 = 4.66%.
IRR Calculation
IRR includes every dividend's timing. For cash flows -10,000, +2,000, +2,000, +2,000, +14,000, Excel =IRR(...) returns 20.0%.
CAGR understates the true return because it ignores the $8,000 of dividends received before the final sale. IRR captures the full picture.
Use CAGR When
- ✓You have one initial investment and one final value.
- ✓You want to compare investments over the same time period.
- ✓There are no intermediate deposits or withdrawals.
- ✓You need a quick, easy-to-understand annualized return.
Use IRR When
- ✓There are multiple cash flows over time.
- ✓You want to account for the timing of each cash flow.
- ✓You are evaluating a project or business investment.
- ✓You have irregular contributions like a SIP or DCA plan.
Frequently Asked Questions
No. CAGR measures smoothed annualized growth between two values. IRR accounts for the timing and size of multiple cash flows.
IRR can be lower when early cash flows are small and later cash flows are large, because money received earlier is more valuable.
No. For monthly contributions, use XIRR because each contribution has a different investment horizon.
CAGR is better for comparing lump-sum investments over the same period. IRR or XIRR is better for SIPs.
Try Our Free CAGR Calculator
Calculate CAGR, final value, initial investment, or time period instantly. No signup required.
Open Calculator