XIRR vs CAGR: What Your SIP Actually Earned.
Your fund app's number is right — here's where quick mental maths fails
You put in ₹6 lakh. What came back tells only half the story.
Deepa opened her fund statement after ten years of SIPs. The app showed 12% returns. Her friend Kavitha ran the same fund, calculated returns herself by dividing profit by amount invested, and got a very different number. They argued for an hour. Both were certain they were right. One was measuring the wrong thing.
CAGR measures a single starting point to a single ending point. You invest ₹1,00,000 today. In six years it becomes ₹2,00,000. CAGR is 12%. Clean and simple. One rupee in, one rupee out, one rate.
SIPs break this. Every month you add fresh money. The first ₹5,000 you invest in January works for the full ten years. The ₹5,000 you invest in the last month works for barely a few weeks. CAGR treats them as if they started on the same day. They did not.
XIRR solves this by treating each instalment as a separate cash flow with its own entry date. It then finds the single annual rate that makes the entire sequence balance to zero. Every debit, every day of growth, accounted for. That rate is your true return.
For a lump sum, XIRR and CAGR give you exactly the same number. When money arrives at one moment, the two formulas are mathematically identical. The gap only appears when money drips in stages. A SIP does this every single month.
The savings jar fills one drop at a time
Imagine filling a jar during monsoon — not with one bucket, but with drops falling month after month. The first drops hit the bottom in June. By October the jar is fuller. But those June drops have been there far longer — they did more work. Your SIP is that jar. Each ₹5,000 lands on a different date and starts compounding from that date, not from the day you opened the SIP. XIRR measures each drop's journey separately. CAGR cannot.
Why this matters
Your fund app shows XIRR. Many online calculators do not. When you compare your SIP to a PPF or an FD, use XIRR for both. Otherwise you are comparing a correct number to an incorrect one. The honest number stops you from switching funds for the wrong reason, or staying in a poor one for the wrong reason. AMFI guidelines recommend XIRR as the standard method for disclosing SIP returns on fund fact sheets precisely because nothing else is fair.
Move the sliders. Watch your true XIRR appear beside the guess.
Enter your monthly SIP amount and the number of years. See your real XIRR alongside the naive estimate — and watch the gap between them appear.
XIRR vs CAGR: what your SIP actually earned
You invested 600000 over 10 years to build ₹12 lakh. Dividing total gain by investment suggests a return of 6.8% (Naive CAGR), which is misleading. Each monthly instalment compounded for a different period: your first payment grew for 10 years, your last for one month. XIRR finds the true rate accounting for timing: 12%%. A lump sum of 600000 at 12%% would grow to 1863508.93. The 701813.54 difference is the cost of investing gradually.
Two investments. One honest number. Always use XIRR.
Where people go wrong
- Dividing total profit by total amount investedThis ignores when each rupee entered. The first instalment compounded for years; the last for weeks. Treating them as one pool gives you a number that is neither XIRR nor CAGR. It is just misleading.
- Comparing SIP XIRR to an FD's advertised interest rateFD rates are often quoted as simple interest on the principal. XIRR is an annualised compound rate. You need to compare like with like — confirm whether the FD rate is simple or compounded before drawing any conclusion.
- Blaming the fund when XIRR looks lower than expectedLate instalments always pull the average holding period down — that is mathematics, not fund performance. XIRR can look modest on a young SIP simply because most of the money arrived recently.
- Using the first SIP date as the start for all moneyIf you run a 10-year SIP, most of your money arrived in the middle and later years. Treating day one as the start date for all of it overstates how long those rupees actually had to compound.
CAGR works for lump sums. For SIPs, it overstates by assuming all money arrived on day one.
XIRR is the only fair number to compare your SIP against an FD, PPF, or any other investment.
For a lump sum, XIRR equals CAGR exactly — the difference only appears when money arrives in stages.
People anchor to 'I put in ₹6 lakh and got ₹12 lakh' — a clean ratio that skips the invisible variable: when each rupee actually started working. Timing is as important as amount, but far harder to see.