XIRR vs CAGR (2026): What is the Difference & Which Return Should You Check?

You open your mutual fund app. One screen says your return is 12%. Another screen says 15%. Why the difference?

Have you ever felt proud sharing your “15% returns” with friends, only to check later and wonder if you got the number right? This confusion is super common among Indian investors — especially those doing monthly SIPs. The answer lies in understanding two key metrics: CAGR and XIRR.

Let’s clear it up once and for all, with simple examples that feel familiar — like your daily chai budget or that Diwali bonus investment.

1. What is CAGR (Compound Annual Growth Rate)?

CAGR is the simplest way to measure growth. It only cares about two things: the starting value and the ending value over a period.

It tells you the steady annual rate that would turn your initial investment into the final amount if growth was perfectly smooth. It’s perfect for lumpsum investments like a one-time Fixed Deposit, gold purchase, or single mutual fund investment.

2. CAGR Formula Explained

The math behind CAGR is straightforward:

Step-by-step example:

• Beginning Value: ₹1,00,000
• Ending Value: ₹2,00,000
• Years: 5
• CAGR = (2,00,000 / 1,00,000)^(1/5) - 1 = (2)^0.2 - 1 ≈ 14.87%

Your money grew at about 14.87% compounded annually — clean and simple.

3. What is XIRR (Extended Internal Rate of Return)?

Real life is rarely as simple as "invest once and wait." You probably do a monthly SIP (Systematic Investment Plan). Or maybe you added extra money during a market dip, or redeemed some for an emergency.

CAGR fails here because it cannot handle multiple deposits or withdrawals on different dates. This is where XIRR shines.

XIRR calculates your personalised rate of return by considering the exact timing of every rupee you put in (or took out). Money invested longer gets more "credit" for growth.

4. How XIRR Works

XIRR finds the single annual rate that makes the net present value of all your cash flows equal to zero. It’s like solving a puzzle: "What return rate explains my final portfolio value given when I added each SIP?"

It’s the same logic banks use for loan EMIs — but in reverse.

5. Comparison: When to Use What?

Here is the cheat sheet every Indian investor needs:

Scenario	Use CAGR	Use XIRR	Why?
Fixed Deposit (FD)	✅ Yes	❌ No need	Single investment, fixed tenure
Lumpsum Mutual Fund	✅ Yes	✅ Also works	One-time investment
Monthly SIP	❌ Inaccurate	✅ Must use	Multiple timed investments
Irregular Investments/Redemptions	❌ No	✅ Yes	Real-life cash flows

6. Common Mistakes Indian Investors Make

Many people calculate "absolute return" (total profit ÷ total invested) and then divide by years — that’s wrong for both!

Example: ₹1.2 Lakh total SIP over 2 years → ₹1.8 Lakh final value.
Profit ₹60,000 → Absolute return 50% → "25% per year"?
No! This ignores compounding and timing. Correct XIRR would be around 38–40% depending on exact dates.

Another mistake: Using CAGR formula on SIP total invested as "beginning value". It overstates returns dramatically.

7. Real-Life SIP Example

Imagine Raj from Mumbai started a ₹10,000 monthly SIP in an equity fund during the 2020 crash.

• Total invested over 3 years: ₹3.6 Lakhs
• Final value in 2026: ₹6.5 Lakhs

Wrong way (treating as lumpsum): CAGR on average investment → wildly inaccurate.
Correct XIRR: ~22% (because early investments during low markets grew massively).

If the same money was lumpsum at the start, CAGR might be only 18%. SIP’s rupee cost averaging boosted the personalised return!

8. Why Timing Changes Everything

Investing more when markets are down = higher XIRR.
Investing heavily just before a correction = lower XIRR (even if final value is decent).

That’s why disciplined monthly SIPs often show surprisingly good XIRR over long periods — you automatically buy more when prices are low.

9. Summary for Investors

• If you invested once (Lumpsum), check the CAGR.
• If you invest regularly (SIP) or irregularly, always check the XIRR.
• In most Mutual Fund apps (like Zerodha Coin, Groww, or Kuvera), the "Portfolio Return" you see is actually XIRR because it accounts for all your SIP installments.

Want to see if your SIP beats a Lumpsum investment? Read our detailed guide on SIP vs Lumpsum Investment Strategy.