CAGR vs XIRR: Why SIPs Need XIRR (With Real Examples)

TL;DR

CAGR = Compound Annual Growth Rate (for single lumpsum investments)
XIRR = Extended Internal Rate of Return (for multiple cash flows like SIP)
Never compare SIP CAGR with lumpsum CAGR—they're apples and oranges
XIRR accounts for timing of each SIP installment
Most fund houses report SIP returns incorrectly using point-to-point CAGR
Use Excel/Google Sheets XIRR function for accurate SIP calculations

Introduction

If you've ever compared your SIP returns with a lumpsum investment, you might have felt confused—or even disappointed. "My friend invested a lumpsum and got 15% returns, but my SIP only gave 12%. Did I make a mistake?"

The real mistake? Using the wrong metric. Most investors (and even some advisors) use CAGR to calculate SIP returns, which is fundamentally incorrect. The right metric is XIRR.

Let's understand why, with real examples.

What is CAGR?

CAGR stands for Compound Annual Growth Rate. It tells you the steady annual rate at which your investment would have grown if it compounded at a constant rate.

CAGR Formula

CAGR = [(Final Value / Initial Investment)^(1/n)] - 1

Where n = number of years

Example: Lumpsum Investment

You invest ₹1,00,000 on Jan 1, 2020. On Dec 31, 2024 (5 years), it becomes ₹1,76,234.

CAGR = [(1,76,234 / 1,00,000)^(1/5)] - 1
CAGR = [1.76234^0.2] - 1
CAGR = 1.1199 - 1
CAGR = 0.1199 or 11.99%

Your investment grew at a steady 12% per year.

This is perfect for lumpsum investments where:

✅ Single initial investment
✅ Single final value
✅ No intermediate cash flows

What is XIRR?

XIRR stands for Extended Internal Rate of Return. It calculates returns when there are multiple cash flows at different times—exactly what happens in SIP!

Why XIRR for SIP?

In a SIP:

You invest ₹10,000 on Jan 1, 2020
Another ₹10,000 on Feb 1, 2020
Another ₹10,000 on Mar 1, 2020
... and so on for 60 months

Each installment has:

Different investment dates
Different time durations
Different compounding periods

CAGR can't handle this complexity. XIRR can.

XIRR Formula (Conceptual)

0 = Σ [Cash Flow_i / (1 + XIRR)^((Date_i - Date_0) / 365)]

Don't worry about the math—Excel and Google Sheets have a built-in XIRR function.

The Problem: Using CAGR for SIP

Many fund houses and comparison websites show "SIP CAGR" by calculating:

Incorrect SIP CAGR = [(Final Value / Total Invested)^(1/n)] - 1

This treats SIP like a lumpsum invested on Day 1, which is wrong because:

Your last SIP installment was just invested recently
Your first installment has been growing for 5 years
Each installment has different compounding time

Result: Misleading and incomparable returns.

Real Example: SIP vs Lumpsum

Let's invest in the same mutual fund using two approaches:

Scenario:

Fund: Nifty 50 Index Fund
Period: Jan 2020 to Dec 2024 (5 years)
SIP: ₹10,000/month (₹6,00,000 total)
Lumpsum: ₹6,00,000 on Jan 1, 2020

Approach 1: Lumpsum

Initial Investment: ₹6,00,000 (Jan 1, 2020)
Final Value: ₹10,57,400 (Dec 31, 2024)

CAGR Calculation:

CAGR = [(10,57,400 / 6,00,000)^(1/5)] - 1
CAGR = 12.01%

Approach 2: SIP

Total Invested: ₹6,00,000 (₹10,000 × 60 months)
Final Value: ₹8,45,230 (Dec 31, 2024)

Wrong CAGR Calculation:

CAGR = [(8,45,230 / 6,00,000)^(1/5)] - 1
CAGR = 7.10%  ❌ WRONG!

This makes it look like SIP underperformed, but that's incorrect.

Correct XIRR Calculation (SIP)

Using Excel/Google Sheets with dates and cash flows:

Date	Cash Flow
Jan 1, 2020	-10,000
Feb 1, 2020	-10,000
Mar 1, 2020	-10,000
...	...
Dec 1, 2024	-10,000
Dec 31, 2024	+8,45,230

XIRR = 13.24%  ✅ CORRECT!

Surprise! The SIP actually outperformed the lumpsum on an XIRR basis.

Why the Difference?

The Nifty 50 was volatile during 2020-2024:

Jan 2020: 12,200
Mar 2020: 8,600 (COVID crash)
Dec 2020: 13,900
Dec 2024: 22,500

SIP benefit: Bought more units during the March 2020 crash, averaging down the cost.

Step-by-Step: Calculate XIRR in Excel

Method 1: Google Sheets

Create two columns: Date and Cash Flow
Enter your SIP dates as negative values (outflow)
Enter final redemption as positive value (inflow)
Use formula: =XIRR(CashFlowRange, DateRange)

Example:

A (Date)	B (Cash Flow)
01-01-2020	-10000
01-02-2020	-10000
01-03-2020	-10000
...	...
01-12-2024	-10000
31-12-2024	845230

Formula in C1: =XIRR(B:B, A:A)

Result: 13.24%

Method 2: Online Calculators

Many Indian finance websites offer XIRR calculators:

Moneycontrol XIRR Calculator
Value Research XIRR Tool
ET Money XIRR Calculator

Simply input your SIP amount, dates, and current value.

Real Portfolio Example

Let's take a real mutual fund:

Parag Parikh Flexi Cap Fund

Period: Jan 2019 to Dec 2024 (6 years)
SIP: ₹5,000/month

Calculations:

Metric	Value
Total Invested	₹3,60,000
Current Value	₹5,87,420
Simple Returns	63.17%
Wrong CAGR	8.54% ❌
Correct XIRR	14.28% ✅

The fund's actual 6-year lumpsum CAGR was 15.2%, so the SIP performed well considering the rupee cost averaging effect.

When CAGR is Lower Than XIRR

XIRR can be higher than CAGR when:

Market fell initially and recovered later (SIP bought cheap)
Volatile markets with dips (rupee cost averaging benefit)
Gradual uptrend (later SIPs ride shorter but steeper growth)

Example: 2020-2024 Indian markets (COVID crash + recovery)

When XIRR is Lower Than CAGR

XIRR can be lower when:

Market rallied strongly in the beginning
Later investments have less time to compound
Consistent bull market from start

Example: 2014-2017 Modi rally (early lumpsum would have won)

Common Mistakes

Mistake 1: "My SIP gave 50% returns!" Reality: That's total returns, not annualized. Use XIRR.

Mistake 2: "My SIP CAGR is 10%, but fund CAGR is 15%. I'm losing money!" Reality: You're comparing apples to oranges. Compare your XIRR to fund's lumpsum CAGR.

Mistake 3: "I'll calculate returns from first SIP date to today" Reality: That's wrong. Use exact dates for each SIP and redemption.

Mistake 4: "XIRR and IRR are the same" Reality: IRR assumes equal time periods. XIRR handles any date spacing.

Practical Tips

Track your SIPs in a spreadsheet
- Maintain Date and Amount columns
- Update current value monthly
- Calculate XIRR automatically
Don't obsess over short-term XIRR
- Meaningful only after 3+ years
- First 1-2 years will show wild swings
Compare apples to apples
- Your SIP XIRR vs fund's lumpsum CAGR (both valid)
- Your SIP XIRR vs friend's SIP XIRR (same fund)
Use portfolio tracking apps
- Most apps (ET Money, Groww, Zerodha Coin) auto-calculate XIRR
- Manual verification recommended quarterly

Absolute vs Annualized Returns

Return Type	Formula	Use Case
Absolute	(Current - Invested) / Invested × 100	Quick snapshot
CAGR	[(Final/Initial)^(1/n)] - 1	Lumpsum performance
XIRR	Complex	SIP/multiple cash flows

Example:

Invested: ₹1,00,000
Current: ₹1,50,000
Duration: 3 years
Absolute Return: 50%
CAGR: 14.47%
Both are correct, but CAGR is more meaningful for comparison.

Industry Standards

SEBI mandates mutual funds to report:

Lumpsum returns: CAGR (1Y, 3Y, 5Y, 10Y)
SIP returns: Should be XIRR, but many still use incorrect methods

Check fund fact sheets carefully. Look for "XIRR" or "Annualized Returns" labels.

Conclusion

Understanding CAGR vs XIRR is crucial for evaluating your investment performance correctly. Here's the golden rule:

Single investment → Use CAGR
Multiple investments (SIP, STP) → Use XIRR
Comparing SIP vs Lumpsum → Compare XIRR to CAGR (acknowledge they measure different things)

Don't let misleading calculations make you question your investment strategy. Calculate your true returns with XIRR and make informed decisions.

Action Item: Open your portfolio statement right now and calculate the XIRR. You might be pleasantly surprised!

Disclaimer: Past performance is not indicative of future returns. Examples are illustrative and based on historical data.