CAGR vs XIRR
What is it?
CAGR (Compound Annual Growth Rate) measures the annualized return of a single lump-sum investment held over a period. XIRR generalizes this same idea to handle multiple cash flows — like SIP installments — happening at different dates. For a single lump sum with no other transactions, CAGR and XIRR give the same result.
Why should you care?
Using CAGR on a SIP portfolio (or XIRR on a pure lump sum, though less commonly wrong) can produce a misleading number. Knowing which metric fits your actual investment pattern matters for reading returns correctly.
Real-life example
An investor who put ₹1 lakh as a single lump sum 5 years ago and now has ₹1.76 lakh can correctly use CAGR (≈12% p.a.). A different investor who SIPed the same total ₹1 lakh in monthly installments over those 5 years, ending at the same ₹1.76 lakh value, needs XIRR instead — a simple CAGR calculation on their numbers would understate their true annualized return, since much of the money was invested more recently.
Common mistakes
- Applying CAGR to a portfolio built through SIPs instead of XIRR.
- Assuming CAGR and XIRR will always differ significantly — for a true lump-sum investment, they're identical.
- Mixing up 'annualized return' language across statements without checking which formula was actually used.
When to use CAGR vs XIRR
| Investment pattern | Correct metric |
|---|---|
| Single lump sum, held to today | CAGR (same result as XIRR) |
| SIP or multiple lump sums at different dates | XIRR |
| Any withdrawals or switches along the way | XIRR |
FAQ
Which metric do fund fact sheets usually show?
Fund fact sheets typically show CAGR-based point-to-point returns for the fund itself (since the fund's NAV history is a single continuous series), not your personal XIRR, which depends on when you invested.
Can a fund's CAGR differ a lot from my personal XIRR?
Yes — a fund's published CAGR reflects its NAV growth over a fixed period, while your XIRR reflects when you personally invested, which can be quite different if you started SIPs partway through a rally or a downturn.
Is XIRR always more accurate than CAGR?
XIRR is more accurate for your personal returns whenever there's more than one cash flow. For a fund's own historical performance (single continuous NAV series), CAGR is the standard and correct metric.
Does CAGR ignore compounding?
No — CAGR specifically measures the compounded annual rate, unlike a simple average of yearly returns, which can be misleading in volatile years.
See this concept applied to your own portfolio
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