What CAGR is answering
Compound annual growth rate asks: if one cheque of ₹P went in on day one and became ₹V after Y years, what constant yearly rate would get you there?
CAGR = (V / P)1/Y − 1
That is the right question for a fixed deposit, a single-purchase index fund, or a point-to-point NAV comparison. It is the wrong question the moment money arrives on more than one date.
What XIRR is answering
Extended internal rate of return asks: what single annual rate r makes the present value of every dated cash flow sum to zero? Investments are negative. Redemptions and current value are positive. Time is measured in actual days over 365, the Excel convention.
Early SIP instalments sit in the market longer, so they deserve more weight. A rupee you added last month barely had time to work. XIRR is the only common spreadsheet function that keeps that distinction.
Where the two numbers meet — and split
| Situation | Use | Why |
|---|---|---|
| One lump, held, then fully sold | Either | XIRR and CAGR collapse to the same rate. |
| Monthly SIP, still holding units | XIRR | Money went in on 24 or 60 different dates. |
| SIP + one extra lump + a partial redeem | XIRR | CAGR has no slot for the extra flows. |
| Comparing two NAVs of the same fund | CAGR | You are measuring the fund, not your behaviour. |
| Distributor “absolute return” on total invested | Neither, blindly | A 40% pile after five staggered years is not 40% a year. |
The SIP trap in one sentence
Taking current value ÷ total invested and shoving that ratio through a CAGR formula pretends the entire SIP landed on day one. Later instalments get credit for years they never served. The headline rate is usually too low in a rising market and too high in a falling one.
On the worked example, three ₹25,000 purchases grow to ₹1,15,000. XIRR is12.06% a year. The naive CAGR on the pile is only9.49%. Same rupees, worse story, because CAGR ignored when the money arrived.
Fund CAGR vs investor XIRR
A scheme can publish a 14% three-year CAGR while your XIRR is 9%. That is not a bug. The fund’s CAGR describes a rupee that was inside for the whole window. Your XIRR describes the rupees you actually sent, including the ones that arrived after the best months. Both can be true at once.
Which number to quote
Quote XIRR when someone asks “how did my SIPs do?” Quote CAGR when someone asks “how did this fund’s NAV move?” Do not average them. Do not pick the larger one for a family WhatsApp group. And do not treat either as a forecast.
Ready to run the dated version? Use the xirr calculator on the home page, or follow theSIP how-to.