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WealthJot.ai

XIRR vs CAGR: Measuring SIP Returns Right

intermediate6 min read

Your SIP shows 9% while the fund shows 14% — neither number is lying. Which one describes YOUR money?

CAGRCompound Annual Growth Rate — the smoothed yearly return. answers: “what did one lump sum, invested at the start, earn per year?” — perfect for a fund’s NAV history, wrong for your SIP, where money arrived in monthly pieces. XIRRThe true annualised return when cash flows are irregular. answers: “what rate did my rupees earn, given exactly when each one arrived?” It is the personal version of the same question, and for any drip-fed investment it is the only honest number.

The confusion peaks after a strong rally: the fund’s 3-year CAGRCompound Annual Growth Rate — the smoothed yearly return. shows 14%, your 3-year-old SIP shows 9% XIRRThe true annualised return when cash flows are irregular., and it feels like something is being hidden. Nothing is — your recent instalments simply haven’t been invested long enough to compound. Half your money has been in the market for under 18 months; the fund’s CAGRCompound Annual Growth Rate — the smoothed yearly return. assumes ALL of it was there for 36. The mirror image happens after crashes: your SIP’s XIRRThe true annualised return when cash flows are irregular. beats the fund’s CAGR, because your instalments bought the dip. Rule: *compare funds with CAGR (or rollingMoving a position from an expiring contract to the next. returns); measure your own journey with XIRR* — and only against goals, not against a lump-sum illusion you never made.
XIRR: the rate r such that Σ CFᵢ / (1+r)^(tᵢ) = current value
Each cash flow CFᵢ (every SIP instalment, any withdrawal) is discounted by exactly how long tᵢ it has been invested. Spreadsheets solve it with =XIRR(values, dates).
ExampleYou SIP ₹20,000/month for 3 years (₹7.2 lakh in) and the value is ₹8.6 lakh. Naive math says +19% “return”. CAGRCompound Annual Growth Rate — the smoothed yearly return. of the fund over those 3 years: 14%. Your XIRRThe true annualised return when cash flows are irregular.: ~11.8% — the true annualised rate your staggered rupees earned. All three numbers are computed from the same account; only XIRRThe true annualised return when cash flows are irregular. describes your money’s actual experience.
Test yourselfThe fund’s 5-year CAGR is 15% but your 5-year SIP shows 11% XIRR. Who is wrong?
Nobody. CAGR measures one hypothetical lump sum held the full 5 years; your SIP’s later instalments were invested for much shorter periods, so a late rally lifts the fund’s CAGR more than your XIRR. Judge the FUND by CAGR/rolling returns; judge YOUR journey by XIRR against your goal’s required rate.
✓ You learnedCAGRCompound Annual Growth Rate — the smoothed yearly return. is the fund’s number (one lump sum, full period); XIRRThe true annualised return when cash flows are irregular. is YOUR number (every instalment weighted by its actual time invested). SIP investors should track XIRRThe true annualised return when cash flows are irregular., expect it to lag fund CAGRCompound Annual Growth Rate — the smoothed yearly return. after rallies and beat it after dips, and compare it against the return their goal plan assumed.
FAQs
What XIRR is "good" for an equity SIP?

Judge it against the assumption in your plan (usually 10-12%) and over a long-enough window: XIRR over under ~5 years is dominated by market phase, not fund quality. A 5-7 year XIRR of 11-13% on an equity SIP is on-plan; consistently below your plan’s rate across market cycles is the signal to examine the fund — via ITS rolling returns vs category, not via your XIRR alone.