"My SIP is up 30%" sounds clear, but it says nothing about how long that took or when the money went in. Two measures fix that: CAGR for a single investment, and XIRR for many cash flows on different dates.
CAGR: one amount in, one value out
CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1
For illustration, ₹1 lakh grows to ₹1.8 lakh in five years. The absolute return is 80%; the CAGR is about 12.47% a year.
Why CAGR breaks down for SIPs
In a SIP, money goes in every month. The first instalment is invested for the whole period; the last for only a few weeks. Annualising the total gain over the full period treats every rupee as if it was invested on day one, which understates the true rate.
XIRR: many cash flows, real dates
XIRR finds the single annual rate at which all your cash flows — money invested as outflows, current value or withdrawals as inflows — balance out, taking each date into account.
| Date | Cash flow |
|---|---|
| 1 Jan 2021 | −₹50,000 invested |
| 1 Jan 2023 | −₹50,000 invested |
| 1 Jan 2026 | +₹1,30,000 current value |
The absolute gain is 30%. Treating the full ₹1 lakh as invested for five years suggests about 5.4% a year. XIRR recognises that the second ₹50,000 was invested for only three years and gives about 6.7% a year.
Which to use when
| Situation | Measure |
|---|---|
| One lump sum held for a period | CAGR |
| SIPs, top-ups or several purchases | XIRR |
| Partial withdrawals or an SWP | XIRR |
| A fund versus its benchmark over a fixed period | CAGR (point-to-point) |
| Your own portfolio's actual experience | XIRR |
Common pitfalls
- Comparing your SIP's XIRR with a fund's point-to-point CAGR; they measure different experiences.
- Annualising returns over less than a year, which exaggerates short-term swings.
- Forgetting that both measures look backwards.
Try both: the CAGR Calculator for a single investment and the interactive XIRR explainer for irregular cash flows.