1/ One mistake people do while calculating the returns from an investment is ignoring Dividends. While it may not amount to much for companies with a low Dividend Payout, it is significant for companies with a high Dividend Payout. Let's take the example of ITC.

2/ On 01/01/1996, ITC was trading at Rs. 5.58 and the latest closing price is Rs. 187.10 (Adjusted for Splits). If you calculate the CAGR between these two dates including the 3 Bonuses between those dates, it's about 20.92%.

3/ A more realistic assumption is a fixed monthly investment (SIP). If you'd invested Rs. 1,000 in ITC every month from 01/01/1996 to 13/11/2020, you would get an IRR of 19.66% (Including Bonuses, excluding Dividends).

4/ But the most precise calculation is the one including Dividends and ITC is high Dividend payer. In the last calculation, if you include the Dividends you'd have received from ITC, the IRR jumps from 19.66% to 27.10% - a significant change, especially over such a long period.

5/ If you want a more extreme example, consider Swaraj Engines. A lumpsum investment since the IPO would have given a CAGR of 16%, whereas the IRR including Dividends is 46% (Yes - I know). This calculation is done by Dhiraj Dave from ValuePickr. https://forum.valuepickr.com/t/swaraj-engines-great-cash-flows/268/75?u=dineshssairam

6/ ITC IRR Calculation file. If I have made any mistakes, feel free to point out. But if it's a minor one, I think we can ignore it. The major aim of this exercise was to show how excluding Dividends can have a (wrong) negative impact on your returns. https://www.dropbox.com/s/jbp4bs3gskhk7bl/ITC%20IRR%20Calculation.xlsx?dl=0