When evaluating mutual fund returns, CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return) are two essential metrics. While both help you understand how your investments have grown, they do so in very different ways. CAGR works best for lump sum investments, assuming a consistent growth rate over time. XIRR, on the other hand, is designed for scenarios where money is invested or withdrawn at multiple points—like with SIPs.
Understanding these differences isn't just for data geeks. Whether you're investing for a goal or just trying to track your fund’s performance better, knowing which metric gives you the most accurate picture can help you make smarter, more informed choices. If you’re aiming for precise performance tracking, choosing the right metric XIRR or CAGR can shape better investment strategies. Explore mutual fund returns more clearly.
What is XIRR?
XIRR, or Extended Internal Rate of Return, is a return metric that accounts for real-life investment behaviour—where you might invest irregularly, top up your portfolio occasionally, or redeem partially over time. It’s an improved version of IRR and is especially useful for SIPs or portfolios with multiple transactions.
What makes XIRR so powerful is that it factors in both the amount and the exact date of each cash flow. So, rather than assuming your investments grow evenly, it gives you a more personalised and accurate picture of how your money has performed over time. If you’ve ever invested in mutual funds through SIPs or made staggered investments, XIRR is the metric you should be watching. Since XIRR reflects the timing and amount of every investment or redemption, it’s ideal for tracking performance in flexible SIP setups or varied contributions. Start SIPs with just Rs. 100
What is CAGR?
CAGR, or Compound Annual Growth Rate, is all about simplicity. It tells you the average yearly growth rate of your investment as if it grew at a steady pace, even if it didn’t. Think of it as the “straight line” version of your investment journey, smoothing out the bumps to show how fast your money would have grown each year, on average.
CAGR is best used when you make a one-time lump sum investment and let it grow untouched. It doesn't account for interim additions or withdrawals, but it's still incredibly useful when comparing different investment options over the same time period. If your investment style is more set-it-and-forget-it, CAGR is a great snapshot of performance. If your investment style is lump sum and steady, CAGR can simplify comparison across multiple mutual fund options. Compare top mutual fund options today
Difference between CAGR and XIRR
While both CAGR and XIRR are used to measure returns, the way they interpret your investment journey is fundamentally different. CAGR simplifies things—it assumes you invested once and held that investment for a set period without making any changes. It gives a clean, average annual return, perfect for straightforward investments.
XIRR, on the other hand, embraces the complexity of real-life investing. It adjusts for every cash flow and its timing, making it ideal for SIPs or any situation where investments or withdrawals happen irregularly. In short: CAGR offers simplicity; XIRR delivers precision.
XIRR vs CAGR: Key differences in a comparison table
To break down the contrast more clearly, here’s a point-by-point comparison:
Particulars |
XIRR |
CAGR |
Cash Flow |
Accommodates multiple, irregular flows |
Assumes a single initial investment |
Suitability |
Varied investment timelines |
Single, uniform investment period |
Precision |
High, adjusts to specific cash flows |
Lower; averages out investment growth |
Complexity |
Relatively high, needs detailed cash flow data |
Simpler; easier to calculate |
Application |
Versatile; fits complex investments |
Ideal for steady, one-time investments |
Calculation |
Accounts for timing and cash flow amount |
Uses start/end values and time period |
Timing of Investment |
Tracks each investment/withdrawal individually |
Assumes one-time investment with no additions |
Accuracy |
More precise for irregular cash flows |
May miss details in non-uniform investments |
Investment Type |
Great for SIPs or staggered contributions |
Works well for lump sum investments |
Rate of Return |
Adjusts for all transaction timings |
Shows average yearly growth without timing nuance |
Formula and numeric example for CAGR
The Compound Annual Growth Rate (CAGR) is calculated using this formula:
CAGR = (Final Value / Initial Value) ^ (1/n) – 1
Where:
Final Value is the value of the investment at the end
Initial Value is what you started with
n is the number of years
Let’s say you invested Rs. 1,00,000 in 2020, and by 2025 it grew to Rs. 1,61,051. Here’s how the CAGR works:
CAGR = (1,61,051 / 1,00,000) ^ (1/5) – 1 = 10%
This means your investment grew at an average annual rate of 10% over five years, assuming steady growth and reinvestment of earnings. It’s simple, but it doesn’t capture any changes or withdrawals during the investment period.
Formula and numeric example for XIRR
Unlike CAGR, XIRR doesn’t have a single formula—it’s calculated using iterative methods, often in tools like Excel or Google Sheets. The formula structure is:
=XIRR(values, dates, [guess])
Values are your cash flows (investments are negative, returns are positive)
Dates are when those cash flows occurred
Guess is optional and usually not needed
For example:
Date |
Amount (Rs.) |
01/01/2020 |
-1,00,000 |
01/01/2022 |
-50,000 |
31/12/2024 |
+1,80,000 |
Applying the formula in Excel:
=XIRR({-100000, -50000, 180000}, {01/01/2020, 01/01/2022, 31/12/2024})
Results in: XIRR ≈ 4.28%
This shows your actual annualised return, adjusted for each investment's timing. It’s especially useful when you don’t invest all at once.
XIRR vs CAGR: Pros and Cons
Let’s weigh both methods:
Factor |
XIRR |
CAGR |
Pros |
Accounts for varying investment timings; ideal for SIPs or complex portfolios. Gives a real-world return picture. |
Easy to use and interpret. Offers a clean, consistent rate for comparison. |
Cons |
More complex and data-sensitive. Needs exact dates and amounts. |
Ignores cash flow timing. May oversimplify real investment returns. |
Limitations or Assumptions associated with XIRR And CAGR
While both XIRR and CAGR are useful for measuring investment returns, they come with limitations that investors should be aware of.
XIRR relies on the accuracy of transaction data—both in terms of amounts and dates. A slight error in input can skew the results significantly. It also assumes that any cash inflow (like dividends or redemptions) is reinvested at the same rate, which is often not the case in real-world scenarios. This reinvestment assumption might inflate return expectations.
CAGR, on the other hand, is based on the assumption of a steady growth rate throughout the investment period. It overlooks market volatility and interim cash flows, offering a simplified snapshot that might not reflect actual investment dynamics. It also ignores external factors like taxes or transaction charges, potentially misleading an investor about real net returns.
CAGR vs XIRR for SIP: Which is better?
For Systematic Investment Plans (SIPs), XIRR is clearly the better metric. SIPs involve regular, periodic investments, which means the cash flows are staggered across time. CAGR, which assumes a single investment at the beginning, fails to capture this timing and can distort the actual performance of a SIP.
XIRR, by accounting for each instalment and its respective date, provides a more accurate picture of returns generated on your money. It tells you how each rupee has performed based on when it was invested and how long it remained in the market. That’s why for SIPs, where consistency and timing matter, XIRR offers a far more realistic return calculation. If your mutual fund journey includes SIPs or staggered contributions, using XIRR over CAGR ensures you're not missing the true performance of your investments. Start your SIP journey today
Situations where CAGR is the more appropriate method of calculating returns
CAGR is best used when your investment pattern is simple and straightforward. Here are a few instances where CAGR is the preferred choice:
When you make a one-time lump sum investment and do not add or withdraw funds during the investment period.
When you want to compare the historical performance of different mutual funds, stocks, or sectors over the same time period.
When the focus is on long-term performance trends and not short-term volatility.
When evaluating portfolio components individually without the complexity of inflows and outflows.
When you need a quick, high-level snapshot of how your investment has grown over time without going into detailed transaction history.
Final thoughts on XIRR vs CAGR
XIRR and CAGR are both powerful tools—but knowing when to use each makes all the difference. CAGR is great when you want simplicity. It offers a neat, average annual growth figure for lump sum investments and works well for comparisons. But it smooths over the ups and downs and ignores cash flow timing. XIRR, on the other hand, brings precision. It respects the timing and impact of every inflow and outflow. This makes it perfect for SIPs, portfolios with multiple transactions, or any investment scenario where the path isn’t straight.
Ultimately, smart investing isn't just about where you put your money—it’s also about how you measure its growth. And that begins with choosing the right metric. When precision matters especially in dynamic portfolios XIRR offers clarity that CAGR cannot match, making it a preferred metric for the modern investor. Evaluate your portfolio with confidence.
