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XIRR vs CAGR: Measuring What You Actually Earned

Understand the difference between XIRR and CAGR, and when to use each for measuring investment returns.

Published July 2, 20258 min read

XIRR vs CAGR: Measuring What You Actually Earned

I've been in this business long enough to see investors make the same mistake over and over: they confuse performance measurement with performance reality. You might think your mutual fund delivered 15% returns, but did you actually earn 15%?

That's where understanding XIRR versus CAGR becomes crucial. These aren't just fancy acronyms—they tell completely different stories about your money.

The Tale of Two Numbers

CAGR (Compound Annual Growth Rate) is what the fund house shows you. It's the smooth, steady growth rate that turns your initial investment into the final value. Clean, simple, and often misleading for real investors.

XIRR (Extended Internal Rate of Return) is what you actually earned. It accounts for when you invested, how much you invested, and when you took money out. Messy, realistic, and often humbling.

When CAGR Tells the Whole Story

CAGR works perfectly when you have:

  • One investment date
  • One exit date
  • No additional investments in between

Example: You invested ₹1 lakh in a mutual fund on January 1, 2020, and it became ₹1.5 lakhs on December 31, 2022.

CAGR = (1.5/1)^(1/3) - 1 = 14.47%

This tells you exactly what happened. The fund grew at 14.47% annually. Period.

When CAGR Lies to Your Face

Now here's where it gets interesting. Most of us don't invest like that. We do SIPs, we miss months, we invest bonuses, we withdraw for emergencies. CAGR can't handle this reality.

Real-world example:

  • Start SIP of ₹10K/month in January 2020
  • Miss SIP in March 2020 (COVID panic)
  • Increase to ₹15K from June 2021 (salary hike)
  • Take out ₹50K in December 2021 (emergency)
  • Current value: ₹4.2 lakhs

What's your return? CAGR can't tell you. It doesn't know how to handle multiple cash flows at different times.

XIRR: The Reality Check You Need

XIRR calculates what rate of return would make the present value of all your cash outflows equal to your current investment value. It's like asking: "At what interest rate would I need to invest in a bank to get the same result?"

The same example with XIRR:

Jan 2020: -10,000 (first SIP)
Feb 2020: -10,000
Mar 2020: 0 (missed)
Apr 2020: -10,000
...continuing the pattern...
June 2021: -15,000 (increased SIP)
...
Dec 2021: +50,000 (withdrawal)
...
Current value: +420,000

XIRR might show 8.3% - significantly different from what you'd assume looking at absolute returns.

The SIP Reality Check

This is where most investors get shocked. They see their SIP statement showing "Current Value: ₹5 lakhs, Invested: ₹4 lakhs" and think they made 25% returns. Wrong.

If you invested ₹4 lakhs over 4 years through monthly SIPs, your money wasn't working for the full 4 years. The first ₹10K worked for 4 years, but the last ₹10K worked for just 1 month.

XIRR accounts for this time-weighting. CAGR doesn't.

When Each One Matters

Use CAGR When:

  • Comparing fund performance: "Fund A grew at 12% CAGR vs Fund B at 10%"
  • Goal planning: "I need 15% CAGR to reach my target"
  • Lumpsum investment tracking: You invested once and want to see fund performance

Use XIRR When:

  • Measuring your actual returns: "Did my SIP strategy work?"
  • Comparing your portfolio vs benchmark: "Am I beating the market?"
  • Making investment decisions: "Should I continue this SIP?"

The Timing Game

Here's something that'll make you think twice about timing: XIRR is brutally honest about when you invested.

Bull market SIP: Started SIP in 2016, continued through 2021. Your XIRR might be 16-18% because you kept buying low initially.

Bear market SIP: Started SIP in 2021, continued through 2022 crash. Your XIRR might be negative or single-digit, despite the fund's long-term CAGR being 12%.

The Behavior Penalty

This is where it gets psychological. I've seen investors with XIRRs significantly lower than fund CAGRs because of:

  1. Panic selling: Stopping SIPs during market crashes
  2. FOMO investing: Starting SIPs at market peaks
  3. Switching mania: Moving money between funds frequently
  4. Irregular investing: Inconsistent SIP amounts and timings

The fund delivered 14% CAGR, but the investor earned 6% XIRR. The 8% difference? Behavior cost.

Practical Examples from the Trenches

The Conservative Aunt

  • Invested ₹2L lumpsum in debt fund in 2019
  • Fund CAGR: 7.2%
  • Her XIRR: 7.2%
  • Verdict: Perfect match because she invested once and held

The Disciplined Engineer

  • Monthly SIP of ₹20K for 5 years, never missed
  • Fund CAGR: 13.5%
  • His XIRR: 12.8%
  • Verdict: Excellent! Close to fund performance despite monthly investments

The Emotional Trader

  • Started ₹15K SIP in 2020
  • Doubled to ₹30K in 2021 bull run
  • Stopped completely in 2022 crash
  • Restarted ₹10K in 2023
  • Fund CAGR: 11.2%
  • His XIRR: 2.1%
  • Verdict: Behavior destroyed returns

Tools and Tactics

Calculating Your Own XIRR

Most mutual fund platforms show this now, but if you want to calculate manually:

  • Use Excel's XIRR function
  • List all your investments as negative values
  • List withdrawals as positive values
  • Current value as final positive value
  • Include exact dates

Reading Fund Fact Sheets

  • CAGR since inception: What the fund achieved
  • Rolling returns: CAGR over different periods
  • Your XIRR: What you actually earned (check your portfolio)

Advanced Concepts for the Committed

Modified Dietz vs XIRR

For monthly reporting, some platforms use Modified Dietz method. It's faster to calculate but less accurate than XIRR for irregular cash flows.

TWRR (Time-Weighted Return)

This is what fund managers use internally. It removes the impact of cash flows to show pure portfolio management skill. Interesting for fund analysis, irrelevant for your personal returns.

Common Myths Busted

Myth: "SIP always gives better XIRR than lumpsum"
Truth: Depends entirely on market timing. SIP protects you from bad timing but doesn't guarantee better returns.

Myth: "Higher CAGR fund means higher XIRR for me"
Truth: Your investment pattern matters more than fund selection beyond a point.

Myth: "Negative XIRR means I lost money"
Truth: Could mean your recent investments haven't had time to grow. Check absolute gains too.

The Bottom Line

CAGR tells you how the fund performed. XIRR tells you how you performed. Both matter, but for different reasons.

When choosing funds, look at CAGR. When evaluating your strategy, track XIRR. When making investment decisions, understand both.

The investors who build real wealth? They focus on strategies that maximize their XIRR, not chase funds with the highest CAGR.

Want to see how your investments are really performing? Use our SIP calculator to model different scenarios and mutual fund calculator to analyze your current portfolio's XIRR.

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