- What is CAGR?
- What is XIRR?
- Why a SIP Breaks CAGR
- CAGR vs XIRR at a Glance
- Which One Should You Use?
- Common Confusion: Don't Compare a Fund's CAGR to your XIRR
- Things to Keep in Mind
- Conclusion
CAGR and XIRR both express an investment's return as a percentage per year, but they suit very different situations. CAGR works when you invest once and withdraw once. XIRR is built for the messy reality of many investments made on different dates, like a SIP. Use the wrong one, and the return figure can be badly misleading.
What is CAGR?
CAGR (Compound Annual Growth Rate) is the steady yearly rate at which a single investment grew from start to finish. Its formula is:
CAGR (%) = ((Ending Value ÷ Starting Value) ^ (1 ÷ number of years) − 1) × 100
Example: you invest ₹1,00,000 once, and after 3 years it is worth ₹1,40,000. CAGR = ((1,40,000 ÷ 1,00,000) ^ (1/3) − 1) × 100 ≈ 11.9% a year. CAGR assumes one inflow at the start and one value at the end, which is exactly why it fits lump-sum investments.
What is XIRR?
XIRR (Extended Internal Rate of Return) is the single annual rate that ties together many cash flows happening on different dates. It accounts for both the amount and the exact timing of every investment and withdrawal. There is no simple hand formula; it is calculated by a spreadsheet using the XIRR function, where you list every cash flow (money invested as negative, money received as positive) against its date.
Why a SIP Breaks CAGR
In a SIP, each monthly instalment is invested for a different length of time, the first for the full period, the last for barely a month. CAGR cannot handle that, because it assumes a single start date. XIRR can, because it weights each instalment by how long it actually stayed invested.
Example: you invest ₹10,000 a month for 12 months, ₹1,20,000 in total, and at the end of the year it is worth ₹1,32,000.
- The simple (absolute) gain is 10%.
- But your later instalments were invested for only a month or two, so your money was not working for the full year. The XIRR, the true annualised return, is about 19%.
The 10% understates how the fund did; the 19% XIRR reflects it correctly.
CAGR vs XIRR at a Glance
| CAGR | XIRR | |
| Cash flows it handles | One investment, one redemption | Many investments/withdrawals on any dates |
| Accounts for timing of each flow | Not needed (single flow) | Yes |
| Best for | Lump-sum investments; comparing fund performance | SIPs, top-ups, partial withdrawals; your actual returns |
| How to calculate | Simple formula | Spreadsheet XIRR function |
Which One Should You Use?
Use CAGR to judge a fund's past performance or to compare two funds over the same period; it is the standard, like-for-like measure fund factsheets publish. Use XIRR to measure what you actually earned, because your real investing usually involves SIPs, occasional top-ups, and partial redemptions.
Common Confusion: Don't Compare a Fund's CAGR to your XIRR
A fund may advertise a 12% CAGR while your statement shows a 9% XIRR on the same fund, and both can be correct. The CAGR describes a lump sum held for the whole period; your XIRR reflects your specific instalments and their timing. They answer different questions, so comparing them directly is misleading.
Things to Keep in Mind
- XIRR needs the exact amount and date of every transaction; most platforms and account statements compute it for you.
- CAGR is only meaningful over a single, stated period; always note the years it covers.
- Neither number tells you about risk or consistency; a high return may have come with large ups and downs along the way.
Conclusion
CAGR and XIRR are both annual return figures, but for different jobs: CAGR for a single lump sum and for comparing funds, XIRR for the real-world mix of SIPs and withdrawals that makes up most portfolios. Match the measure to the situation: CAGR to size up a fund, XIRR to see what you truly earned, and your return numbers will finally tell you the truth.