XIRR vs. CAGR: which one is actually your return?

CAGR — Compound Annual Growth Rate — answers a narrow question well: if you'd invested a single lumpsum on one date and withdrawn it on another, what constant annual rate would explain the change in value? It assumes exactly two cash flows, nothing in between.

That makes CAGR the correct tool for judging a fund's own performance — comparing how ₹1 lakh invested in a scheme on a given date would have grown by today, independent of when any particular investor actually bought in. Fact sheets, rankings, and fund comparisons all lean on CAGR for exactly this reason.

It becomes the wrong tool the moment there's more than one cash flow at play — which describes almost every real investor, since a SIP is, by definition, a new cash flow every month.

XIRR — Extended Internal Rate of Return — solves a harder, more useful problem: given a whole series of cash flows, each on its own real date (every SIP instalment, every top-up, every redemption), what single annualised rate makes the present value of all of them net to zero? That single rate is your actual return.

Consider a simplified, illustrative case: you invest ₹10,000 in year one and another ₹10,000 in year three, and by year four the combined holding is worth ₹25,000. A CAGR calculation has no way to represent this properly — it wants one start date and one end date, and it can't account for the second ₹10,000 arriving two years later with less time to grow. Apply CAGR to the first ₹10,000 alone and you'd overstate your overall return; apply it to the total invested against a single start date and you'd understate it. XIRR handles it correctly by discounting each cash flow back to its own date and solving for the rate that reconciles all of them at once.

Practically, this is what your CAS transaction history is for — it's the exact list of dated cash flows an XIRR calculation needs, which is why the two only work together. See what a CAS statement contains if you haven't pulled the transaction data yet.

The gap between XIRR and CAGR isn't rounding error — it can be several percentage points wide, in either direction, depending on how your entries were timed. A fund with an excellent five-year CAGR can still hand a SIP investor a mediocre personal XIRR if a large share of the money went in right before a flat or falling stretch. The reverse also happens: choppy, unglamorous CAGR years can still produce a respectable XIRR if your instalments happened to land at good entry points.

This is precisely why "the fund returned 14% CAGR" and "I earned 14% on my money" are different claims, and only one of them is about you. If you want to know how you've actually done, the fund's fact sheet can't answer that — only your own transaction history can.