Investing
XIRR vs CAGR: Which Return Number Should You Trust?
Use CAGR when you invest once and withdraw once. Use XIRR when money moves on different dates, which describes every SIP. CAGR needs only a start value, an end value and a time period, so it is simple but blind to timing. XIRR takes every dated cash flow and finds the single annual rate that explains them all.
What each one measures
CAGR (compound annual growth rate) answers: “If this one amount had grown at a steady rate, what rate gets it from the start value to the end value?” It is the right tool for a lump sum, a stock you bought once or a fund's performance between two dates. Our guide on what CAGR is covers it in detail.
XIRR (extended internal rate of return) handles the messy reality of SIPs, top-ups and part-withdrawals. You list each cash flow with its date, and it finds the one annual rate at which all of them balance out.
A worked example
Say you invest ₹10,000 on the 5th of each month from January to June 2024, and on 5 January 2025 the holding is worth ₹68,500. You put in ₹60,000, so the absolute gain is 14.2%.
- Treating it as one investment over a year gives a CAGR of roughly 14.1%.
- XIRR gives 18.09%.
The two differ because most of your money was not invested for the full year. The first instalment sat there for twelve months, but the last one only for seven. The same gain earned over a shorter average period means a higher annual rate, and XIRR sees that while CAGR cannot.
When XIRR can mislead
XIRR annualises, so a gain over a short time is scaled up to a full year. A 3% gain in a single month shows up as roughly 43% a year, even though nobody expects to repeat that 12 times in a row. Treat XIRR on holding periods under a year with caution, and do not compare a six-month XIRR with a ten-year one.
How to use XIRR properly
- Count today's value as money received. Enter your current portfolio value as a withdrawal dated today, otherwise there is no gain to measure.
- Compare like with like. Check your fund's XIRR against a benchmark or a similar fund over the same dates, and against a fixed alternative such as an FD.
- Use Excel if you prefer. The XIRR function takes a list of values and a list of dates, with investments as negative numbers, and uses the same method as our calculator.