Key Takeaways
- CAGR suits a single investment with one start and one end value.
- XIRR handles multiple inflows and outflows on different dates.
- For SIPs, XIRR is the appropriate annualised-return measure.
- Both express returns as an annual percentage for easy comparison.
On this page
What CAGR measures
Compound Annual Growth Rate (CAGR) answers a simple question: if one amount grew to another amount over a period, what constant annual rate would produce that? It assumes a single investment and a single redemption, so it is ideal for a lumpsum.
CAGR = (Ending / Beginning)1/years − 1
Why SIPs need XIRR
A SIP is not one investment — it is many, each made on a different date, each invested for a different length of time. CAGR cannot capture that. XIRR (Extended Internal Rate of Return) finds the single annual rate that makes the present value of all those dated cash flows equal to zero, correctly weighting each instalment by how long it stayed invested.
Illustration: the same money, two measures
One-time investment. ₹1,00,000 becomes ₹1,50,000 after exactly 3 years. CAGR = (1.5)1/3 − 1 ≈ 14.47% a year. XIRR for these two cash flows gives the same 14.47%, because with a single inflow and a single outflow the two measures coincide.
Monthly SIP. ₹5,000 a month for 10 years ends at ₹11,61,695. Someone who computes CAGR on the total invested — (11.62 ÷ 6)1/10 − 1 — gets about 6.8% and concludes the SIP did poorly. XIRR on the 120 dated instalments gives 12%, the true annualised return. CAGR understates it because it assumes all ₹6 lakh was invested on day one, when in fact the average rupee was invested for only about five years.
Which to use when
| Situation | Use |
|---|---|
| Single purchase, single sale (lumpsum, property, gold) | CAGR (or XIRR — same answer) |
| SIP, top-ups, partial redemptions, dividends taken out | XIRR |
| Comparing a fund's published 3-year return with an FD rate | CAGR — both are point-to-point |
| Comparing your SIP with a fund's published return | XIRR for your SIP; expect it to differ from the fund's CAGR because your entry dates differ |
Pitfalls
- Annualising periods shorter than a year (either measure) produces exaggerated figures.
- XIRR can have no solution or an odd one if cash-flow signs or dates are entered incorrectly — check that investments are outflows and redemptions/current value are inflows.
- Both measures ignore risk: a 12% XIRR earned with wild swings is not the same experience as a steady 12%.
Which to use
- One-time investment held to a date → use CAGR.
- Regular or irregular contributions and withdrawals → use XIRR.
Use RupeeVeda's CAGR Calculator for one-time investments and XIRR Calculator for investments involving multiple dated cash flows. The SIP calculator illustrates growth under an assumed constant rate.
Sources
We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.
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How Compound Interest Works
Compound interest is interest earned on both your principal and previously earned interest. Over time, and with more frequent compounding, it grows money faster than simple interest.
investingHow Does a SIP Work?
Each SIP instalment buys mutual fund units at that day's price. Over time you accumulate units at an averaged cost, and staying invested lets returns compound.
investingHow to Calculate SIP Returns
SIP returns are estimated with the future value of an annuity formula. For real, uneven cash flows, XIRR gives the annualised return that accounts for the timing of each instalment.
investingSIP vs Lumpsum Investing
A SIP spreads investment across time to average out entry prices, while a lumpsum invests everything at once. Each suits different situations and cash-flow realities.