CAGR vs XIRR: Which Number Actually Describes Your SIP Returns?
You check your SIP after three years. You have put in ₹3.6 lakh. The value reads ₹4.3 lakh. A friend tells you to calculate your CAGR. You do, and the answer looks low: about 6%. Your fund factsheet, meanwhile, shows 12% for its three-year return.
Neither number is wrong. They answer different questions, and CAGR is the wrong tool for a SIP. This article explains why, shows you the same example with the right measure, and gives you a way to calculate your own SIP return in a spreadsheet.
Four numbers that all get called “return”
| Measure | What it tells you | Best used for |
|---|---|---|
| Absolute return | Total gain as a percentage of what you put in | Periods under one year |
| CAGR | The yearly rate that turns one amount into another over a period | One investment, one exit |
| XIRR | The yearly rate that accounts for the date of every cash flow | SIPs, top-ups, partial withdrawals |
| Rolling return | The return over a fixed window, repeated across many start dates | Judging how consistent a fund has been |
The NISM study material states the rule plainly: CAGR assumes a single investment and a single redemption, and using it on a SIP understates the investor’s actual return, sometimes by a wide margin (NISM V-A material).
Why CAGR breaks on a SIP
Think about what a SIP does. Your first ₹10,000 sits in the market for three years. Your last ₹10,000 sits there for one month. Your average rupee has been invested for about a year and a half, not three.
CAGR ignores this. It takes total invested money, the final value and the full period, and then assumes all the money was there from day one. That makes the denominator too large and the answer too small.
The same SIP, measured two ways
Here is a worked illustration. You invest ₹10,000 a month for 36 months, and your fund grows at 12% a year in every one of those years (an assumed, even path).
| Item | Value |
|---|---|
| Total invested | ₹3,60,000 |
| Value after 36 months | ₹4,30,793 |
| Absolute return | 19.7% |
| CAGR calculated on total invested over 3 years | 6.2% |
| XIRR | 12.0% |
Illustration with assumed returns, not a real fund.
XIRR returns the 12.0% that we put into the model, because it treats each instalment as invested for its own period. CAGR returns 6.2%, about half the true figure, because it pretends the whole ₹3.6 lakh went in on day one.
Now take a more realistic path with the same SIP: -8% in year one, +20% in year two, +15% in year three. The value after 36 months is about ₹4.40 lakh. XIRR comes out near 13.5%, and the CAGR shortcut gives about 7.0%.
Illustration with assumed returns.
A reader who sees 7% and thinks their SIP is underperforming may move money for the wrong reason. A reader who sees 13.5% has an honest number to compare with a benchmark.
When CAGR is the right tool
CAGR works well when you invest once and take the money out once. If you put ₹1 lakh into a fund and it grows to ₹1.76 lakh in five years, the CAGR is about 12%, and that is a correct description. Factsheets use CAGR-style annualised figures for exactly this reason: they describe a lump sum held from the start date to the end date. Our guide to reading a factsheet explains the other lines you will see next to it.
The trouble starts when you apply that single-investment logic to a stream of instalments.
How to calculate your SIP’s XIRR in a spreadsheet
You can do this in Excel or Google Sheets in about five minutes.
- Get your statement. Download a consolidated account statement from the fund house, from CAMS and KFintech, or from MF Central. It lists each instalment with its date.
- Set up two columns. In column A, list each date. In column B, list each amount as a negative number for every instalment you invested.
- Add today’s value. On the last row, enter today’s date in column A and your current holding value in column B as a positive number.
- Apply the formula. In any empty cell, type
=XIRR(B2:B38, A2:A38)using your own range. The result is a yearly rate. - Add top-ups and withdrawals. If you invested a lump sum or redeemed some units, add those rows too, with investments as negatives and redemptions as positives. XIRR handles any pattern of dates.
If the formula returns an error, check that the first amount is negative and that your dates are real date values, not text.
Three situations where the choice of measure matters
You raise your SIP every April. Your instalments differ in size, so a simple average is wrong. XIRR deals with this without any adjustment. Ruchika, a product manager in Bengaluru, increases her SIP by 10% each year after her appraisal. For her, XIRR is the only fair way to read the account. (Ruchika is a made-up example.)
You added a lump sum from a bonus. One big instalment in the middle changes your average holding period. XIRR reads it correctly. A CAGR on the total would be off in a different direction from the SIP-only error.
You are comparing two funds you started in different months. Two accounts opened on different dates have different cash flows, so their absolute returns say little. XIRR puts both on a yearly footing. Even so, two XIRR figures from different start dates can reflect market timing more than fund quality, which is the point of the start-date lottery.
What XIRR cannot tell you
XIRR describes what happened. It does not predict what will happen, and it does not say the return arrived evenly. A 13.5% XIRR can come from a year of -8% followed by two good years. Two more cautions apply:
- Short periods can mislead. XIRR over a few months can show an extreme yearly rate, such as 40% or -30%, because it projects a short gain across a full year. For periods under a year, look at the absolute figure.
- It does not account for tax or exit load. It reflects the cash flows you enter, so enter after-tax values if you want an after-tax view.
To judge how consistent a fund has been across many start dates, look at rolling returns.
A practical rule of thumb
Use absolute return for anything under a year. Use CAGR for a single investment held from start to finish. Use XIRR for a SIP or any account with several investments or withdrawals. Use rolling returns to compare funds. If a calculator or an app does not say which one it uses, ask.
Artha Vridhi’s SIP planning uses XIRR when reviewing an existing SIP, because it is the number that matches what you actually did with your money.
Who does not need this
If you hold one lump sum and have never added or withdrawn, CAGR is fine and you can stop reading here. And if you do not track your investments at all, an annual look at the XIRR in your statement is plenty.
Frequently asked questions
Is XIRR the same as the return shown for a SIP in my app?
Often yes, but not always. Some apps show CAGR or absolute return for SIPs. Look for the label, and calculate XIRR yourself if it is missing.
Why is my SIP’s XIRR higher than the fund’s 1-year return?
They measure different things. The 1-year return covers one lump sum over one year. Your XIRR covers instalments made at different times, including periods when the fund may have done better.
Can XIRR be negative?
Yes. If your account is worth less than what you invested, accounting for timing, XIRR is negative.
What is the difference between CAGR and average annual return?
Average annual return adds the yearly returns and divides by the number of years. CAGR accounts for compounding, so it is the better description of a multi-year result.
Can you review my SIP’s XIRR for me?
Message us on WhatsApp with your statement and we will work through it with you.
Disclosures
Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
Artha Vridhi is an AMFI-registered Mutual Fund Distributor (ARN-362803). This article is for education and is not personal investment advice. Illustrations use assumed numbers and are not forecasts or promises of return. Distributors are paid commission by fund houses on regular-plan investments.