Introduction
CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return) both express investment performance as a single annualized percentage. They are not interchangeable. Using CAGR where XIRR is required — the most common mistake in SIP reporting — produces returns that are off by hundreds of basis points. This article explains when to use which.
Definitions
- CAGR — the constant annual growth rate that takes a single starting amount to a single ending amount over a fixed period. It assumes one investment in and one redemption out.
- XIRR — the annualized rate that makes the net present value of a series of cash flows on specific dates equal to zero. It handles any number of contributions and withdrawals on any dates.
When To Use Each
| Scenario | Use |
|---|---|
| Lump-sum investment, single redemption | CAGR |
| Monthly SIP into a mutual fund | XIRR |
| Real-estate purchase + later sale | CAGR |
| PPF account with annual top-ups | XIRR |
| Portfolio with multiple buy/sell transactions | XIRR |
| Comparing a fixed deposit's headline rate | CAGR |
If there are two or more cash flows on different dates, the right metric is XIRR.
CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1 / Years) − 1
Variables:
- Ending Value = final value of the investment.
- Beginning Value = initial single investment.
- Years = elapsed time in years (use decimals for partial years).
XIRR Formula
XIRR has no closed-form solution. It is the rate r that satisfies:
0 = Σ [ CFᵢ / (1 + r)^((dateᵢ − date₀)/365) ]
Spreadsheets and calculators solve it numerically (Newton-Raphson). In Excel/Google Sheets: =XIRR(values, dates).
CAGR Worked Example
You invest ₹1,00,000 in a lump sum. After 5 years the value is ₹1,76,234.
CAGR = (1,76,234 / 1,00,000)^(1/5) − 1
= 1.76234^0.2 − 1
= 1.12 − 1
= 0.12 → 12% per year
The same calculation runs in seconds in the CAGR Calculator.
XIRR Worked Example
You SIP ₹10,000 on the 1st of every month for 24 months. Total invested = ₹2,40,000. Value at the end of month 24 = ₹2,89,500.
A naive CAGR-style calculation gives:
"CAGR" = (2,89,500 / 2,40,000)^(1/2) − 1 ≈ 9.8%
This is wrong — it treats ₹2.4L as if it were invested up front on day 1. The first instalment was invested 24 months ago, the last instalment one month ago.
The correct XIRR, computed from the 24 cash-out dates plus one cash-in date, comes out around 18.6%. The CAGR result understates returns by ~880 bps because most of the money was invested for far less than 2 years.
This is why every SIP statement, portfolio tracker, and mutual-fund factsheet reports SIP returns as XIRR. You can compute your own portfolio's XIRR in the XIRR Calculator.
Common Mistakes
- Reporting SIP returns as CAGR. Materially overstates or understates returns. Always use XIRR.
- Ignoring dividends in CAGR. If a mutual fund pays dividends, use NAV growth + reinvested distributions, not just NAV change.
- Using XIRR with two cash flows on the same date. It still works but is mathematically identical to CAGR in that case.
- Treating XIRR as a guarantee. It is a backward-looking measure of what happened, not a prediction.
- Comparing portfolios with different cash-flow patterns by CAGR. Two portfolios with the same CAGR but very different deposit patterns can have very different XIRRs.
FAQs
See below.
Related Calculators
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Conclusion
If your investment has exactly one buy and one sell, CAGR is the right tool. The moment cash flows in or out on more than one date — every SIP, every monthly PPF deposit, every staggered real-estate plot purchase — switch to XIRR. Using the wrong metric does not just round the answer; it can shift it by an entire percentage range.
Educational content; both metrics are standard in SEBI mutual-fund disclosures and CFA-curriculum performance measurement. Not personalized financial advice.