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XIRR vs CAGR: Understanding the Difference

๐Ÿ“– 6 min readยทLast updated: July 2025

Your mutual fund statement shows XIRR, not CAGR. This is deliberate โ€” and understanding why will make you a much better investor.

What is CAGR?

CAGR (Compound Annual Growth Rate) measures the rate at which a single investment has grown from one value to another over a period of years.

CAGR = [(Final Value / Initial Value)^(1/Years) โˆ’ 1] ร— 100

CAGR assumes one investment at the start, and one redemption at the end. It's perfect for comparing how a โ‚น1 lakh lumpsum investment has grown, or comparing two mutual funds' 5-year performance.

What is XIRR?

XIRR (Extended Internal Rate of Return) is a generalisation of CAGR that handles multiple cash flows at different dates. It finds the annual discount rate that makes the net present value of all your cash flows equal zero.

NPV(r) = ฮฃ [ Cแตข / (1 + r)^(dแตข/365) ] = 0

Solved iteratively using Newton-Raphson method

XIRR accounts for the exact date and amount of every investment and redemption, making it the only accurate way to measure returns on a SIP portfolio.

Why CAGR Doesn't Work for SIPs

Imagine you invested โ‚น10,000 per month for 3 years (total โ‚น3,60,000) and your portfolio is now worth โ‚น4,50,000. What's your return?

  • Naive absolute return: (4,50,000 โˆ’ 3,60,000) / 3,60,000 = 25% โ€” but this ignores when you invested.
  • CAGR (incorrect): if you calculate CAGR using the final month's investment date and today, you get a wildly inaccurate number because you're treating a 3-year SIP as a 1-month investment.
  • XIRR (correct): each of the 36 monthly investments is dated precisely. XIRR finds the rate that makes all these flows value out to โ‚น4,50,000 โ€” giving a true annualised return, e.g., 14.3% p.a.

A Concrete Example

Suppose you made 3 investments and one redemption:

  • 1 Jan 2021: โˆ’โ‚น1,00,000 (investment)
  • 1 Jan 2022: โˆ’โ‚น1,00,000 (investment)
  • 1 Jan 2023: โˆ’โ‚น1,00,000 (investment)
  • 15 Jun 2024: +โ‚น4,00,000 (redemption)

Total invested: โ‚น3 lakh. Total received: โ‚น4 lakh. Absolute profit: โ‚น1 lakh (33%). But the XIRR is approximately 13.5% p.a. โ€” a very different number that correctly accounts for the timing of each cash flow.

When to Use CAGR vs XIRR

  • Use CAGR for: Comparing mutual fund 1yr/3yr/5yr performance, lumpsum investments, evaluating fund manager skill
  • Use XIRR for: Your personal SIP portfolio returns, portfolios with irregular investments, any scenario with multiple buy/sell transactions

Why Your Fund Statement Shows XIRR

AMFI (Association of Mutual Funds in India) mandates that consolidated account statements (CAS) show XIRR as the return metric. This is because virtually all retail investors use SIPs or make multiple investments over time โ€” and XIRR is the only metric that accurately captures returns for such portfolios.

๐Ÿ”ข Calculate your portfolio's XIRR instantly using our XIRR Calculator. Enter your investment dates and amounts โ€” we use the same Newton-Raphson algorithm that your fund platform uses.

Conclusion

Both CAGR and XIRR are valuable tools โ€” for different purposes. Always use XIRR to evaluate your personal investment portfolio returns, especially if you invest via SIP. Use CAGR to compare the published performance of mutual fund schemes on a level playing field.