In this article we would cover:

- What is Absolute return, CAGR, XIRR
- Their limitations
- Why does it make sense to use XIRR

**We will use this sample portfolio as an example -**

Sundar invested Rs. 100 every first day of the month for three months. He then exited the portfolio at Rs. 310 exactly after three months.

*A negative value represents outflow/investment/loss (money going out from your pocket). And Positive value represents the inflows/profit (money coming in your pocket).*

Absolute return is the most basic way to calculate returns from an investment. It does not take the time factor into consideration. It simply considers only the amount gained/lost from an investment.

$$

\begin{equation*}Absolute\ return\ =\ \ \left(\frac{V_{final} \ -\ V_{initial}}{V_{initial}}\right)\end{equation*} $$

Sundar's *absolute return* would be `$(310 - 300)/300 = 3.33%$`

<aside> ⚠️ Notice that there's no time factor in the formula. This is a limitation that CAGR tries to solve.

</aside>

CAGR is a common metric used in the financial industry to calculate the *annualized* return of an investment.