ROI vs Absolute Return vs CAGR vs XIRR vs Rolling Return: Understanding the Key Differences with Examples

 "Learn the key differences between ROI, Absolute Return, CAGR, XIRR, and Rolling Return with detailed formulas, examples, and FAQs. Discover which metric best evaluates your investment performance."

When evaluating investment performance, investors often encounter various metrics such as Return on Investment (ROI), Absolute Return, CAGR, XIRR, and Rolling Return. Each of these terms offers different insights, making it crucial to understand their differences and applications.

In this blog, we will break down these terms, explain their formulas, provide real-life examples, and help you decide when to use each metric effectively.

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🎯 1. What is ROI (Return on Investment)?

Return on Investment (ROI) is a simple metric used to calculate the percentage gain or loss from an investment relative to the initial amount invested.

✅ Formula:

$$\text{ROI} = \frac{\text{Final Value} - \text{Initial Investment}}{\text{Initial Investment}} \times 100$$

ROI=Initial InvestmentFinal Value−Initial Investment​×100

📚 Example:

You invest ₹1,00,000 in stocks. After 1 year, your investment grows to ₹1,20,000.

$$\text{ROI} = \frac{(1,20,000 - 1,00,000)}{1,00,000} \times 100 = 20\%$$

ROI=1,00,000(1,20,000−1,00,000)​×100=20%

👉 Interpretation: You made a 20% return on your investment.

⚡️ Pros and Cons of ROI:

• ✅ Easy to calculate and understand.

• ❗️ Does not account for the time duration of the investment.

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🎯 2. What is Absolute Return?

Absolute Return refers to the total percentage gain or loss on an investment over a given period, without considering the time factor.

✅ Formula:

$$\text{Absolute Return} = \frac{\text{Final Value} - \text{Initial Investment}}{\text{Initial Investment}} \times 100$$

Absolute Return=Initial InvestmentFinal Value−Initial Investment​×100

📚 Example:

You invest ₹50,000 in a mutual fund, and after 3 years, the value increases to ₹70,000.

$$\text{Absolute Return} = \frac{(70,000 - 50,000)}{50,000} \times 100 = 40\%$$

Absolute Return=50,000(70,000−50,000)​×100=40%

👉 Interpretation: Your investment yielded a 40% gain over 3 years.

⚡️ Pros and Cons of Absolute Return:

• ✅ Useful for calculating total returns over a specific period.

• ❗️ Does not provide insights on annualized performance.

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🎯 3. What is CAGR (Compound Annual Growth Rate)?

CAGR (Compound Annual Growth Rate) is used to calculate the average annual return of an investment over a specified period. It assumes that the investment has grown at a constant rate year over year.

✅ Formula:

$$\text{CAGR} = \left(\frac{\text{Final Value}}{\text{Initial Investment}}\right)^{\frac{1}{n}} - 1$$

CAGR=(Initial InvestmentFinal Value​)n1​−1

Where:

• n = Number of years

📚 Example:

You invest ₹1,00,000 in an equity fund that grows to ₹1,50,000 in 3 years.

$$\text{CAGR} = \left(\frac{1,50,000}{1,00,000}\right)^{\frac{1}{3}} - 1 = 0.1447 \text{ or } 14.47\%$$

CAGR=(1,00,0001,50,000​)31​−1=0.1447 or 14.47%

👉 Interpretation: Your investment grew at an annualized rate of 14.47% over 3 years.

⚡️ Pros and Cons of CAGR:

• ✅ Provides a smooth annualized growth rate.

• ❗️ Assumes consistent growth, which may not reflect market volatility.

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🎯 4. What is XIRR (Extended Internal Rate of Return)?

XIRR (Extended Internal Rate of Return) calculates the annualized return when there are multiple investments (cash inflows and outflows) at different time intervals.

✅ Formula:

XIRR is calculated using an iterative process to determine the rate of return where the Net Present Value (NPV) of all cash flows equals zero.

📚 Example:

You invest ₹50,000 in January, another ₹30,000 in June, and redeem the total for ₹1,00,000 after 1 year.

• Jan: ₹-50,000

• June: ₹-30,000

• Dec: ₹1,00,000

👉 Result: Assume XIRR comes out to be 18.5%, which is the actual annualized return considering multiple transactions.

⚡️ Pros and Cons of XIRR:

• ✅ Suitable for SIPs and irregular cash flows.

• ❗️ Slightly complex to calculate manually.

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🎯 5. What is Rolling Return?

Rolling Return measures the average annualized returns for overlapping periods of a fixed length, starting on different dates. It helps assess consistency in investment performance over time.

✅ Formula:

$$\text{Rolling Return for period} = \text{CAGR between start and end of each period}$$

Rolling Return for period=CAGR between start and end of each period

📚 Example:

You invest ₹1,00,000 in a mutual fund and want to analyze 3-year rolling returns from 2015 to 2023. Here’s a breakdown:

• 2015–2018 CAGR: 12%

• 2016–2019 CAGR: 14%

• 2017–2020 CAGR: 10%

👉 Interpretation: Rolling returns show how the investment performed over various 3-year periods.

⚡️ Pros and Cons of Rolling Return:

• ✅ Provides insights into performance consistency.

• ✅ Useful for comparing mutual funds and equity returns.

• ❗️ Historical data is required for accuracy.

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📊 Key Differences Between ROI, Absolute Return, CAGR, XIRR, and Rolling Return

Parameter	ROI	Absolute Return	CAGR	XIRR	Rolling Return
Definition	% return on investment	Total % return without considering time	Annualized growth rate	Annualized return with multiple cash flows	Returns over fixed intervals
Formula	ROI Formula	Same as ROI	CAGR Formula	Iterative method	CAGR for each rolling period
Time Factor	No	No	Yes	Yes	Yes
Use Case	Single investment	Single period returns	Long-term investments	SIPs, multiple investments	Performance consistency
Complexity	Easy	Easy	Moderate	Complex	Moderate

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🎯 When Should You Use Each Metric?

• ✅ ROI: Use for quick evaluation of investment profitability.

• ✅ Absolute Return: Useful for evaluating total returns over a specific period.

• ✅ CAGR: Best suited for evaluating long-term investment growth.

• ✅ XIRR: Ideal for evaluating returns from SIPs or multiple investments.

• ✅ Rolling Return: Best for analyzing consistency and volatility over different time periods.

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🧐 Frequently Asked Questions (FAQs)

❓ 1. What is the advantage of Rolling Return over CAGR?

✅ Rolling Return helps analyze performance consistency over multiple overlapping periods, while CAGR shows the average growth over one period.

❓ 2. Which metric is best for evaluating SIP returns?

✅ XIRR is the most appropriate metric to calculate returns from SIPs or multiple cash flows.

❓ 3. Why is CAGR preferred for long-term investments?

✅ CAGR provides an accurate annualized growth rate, making it easier to compare investments over different time frames.

❓ 4. Does Rolling Return capture market volatility?

✅ Yes, Rolling Return provides insights into performance across different time frames, allowing for a better understanding of volatility.

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🎯 Conclusion

Understanding the differences between ROI, Absolute Return, CAGR, XIRR, and Rolling Return helps investors make informed decisions. While ROI and Absolute Return provide a quick glance at returns, CAGR and XIRR give a more accurate picture of long-term growth and multi-investment scenarios. Rolling Return, on the other hand, highlights performance consistency over different time frames.

By choosing the right metric, you can better evaluate your investment performance and plan future investments wisely.

References:

(1)Vashishth, N. (2024, July 9). Decoding mutual fund returns: Absolute, XIRR, CAGR, Rolling & more. The Economic Times. https://economictimes.indiatimes.com/markets/expert-view/decoding-mutual-fund-returns-absolute-xirr-cagr-rolling-more/articleshow/111584421.cms?from=mdr