There is a pressing need for measures of real-life cognitive functioning in patients with mood or psychotic disorders in clinical settings and treatment trials targeting cognition. We developed the first immersive virtual reality cognition assessment tool, the Cognition Assessment in Virtual Reality (CAVIR), which assesses verbal memory, processing speed, attention, working memory and planning skills in an interactive virtual reality kitchen scenario. This study investigates the sensitivity and validity of the CAVIR for cognitive impairments in mood and psychotic disorders and its association with functioning and neuropsychological performance. Symptomatically stable patients with mood disorders (MD; n = 40) or psychosis spectrum disorders (PSD; n = 41) and healthy control participants (HC; n = 40) completed the CAVIR and standard neuropsychological tests and were rated for clinical symptoms and daily functioning. We found that the CAVIR was sensitive to cognitive impairments across MD and PSD with large effect sizes (MD: F(73) = 11.61, p < .01, ηp2 = 0.14; PSD: F(72) = 18.24, p < .001, ηp2 = 0.19). There was a moderate to strong positive correlation between performance on the CAVIR and on neuropsychological tests (r(121) = 0.58, p < .001), which prevailed after adjustment for age, years of education and verbal IQ (B = 0.67, p < .001). Lower CAVIR scores correlated moderately with more observer-rated and performance-based functional disability (r(121) = -0.30, p < .01 and r(68) = 0.44, p < .001, respectively), also after adjustment for age, years of education and verbal IQ (B = 0.03, p < .001). In conclusion, the CAVIR is a sensitive and valid instrument for measuring real-life cognitive impairments in mood and psychotic disorders. After further psychometric assessments, the CAVIR can be implemented in clinical settings and trials targeting cognition.