Summary of this article
XIRR captures all inflows and outflows, making it ideal for SIP returns.
CAGR works only when money is invested once and left untouched.
For SIPs, SWPs and staggered investments, XIRR shows the real returns.
Most mutual fund investors would have come across the term XIRR at some point, especially when checking their systematic investment plan (SIP) returns. And yet, very few actually understand what it means.
Extended internal rate of return (XIRR) is simply a way to calculate annualised returns when your money does not go in or come out at once. In real life, we invest through SIPs, redeem partially, pause investments, restart, make occasional lump sums, basically the cash flows are all over the place. XIRR is a way to calculate the real returns after taking into consideration all these inflows and outflows.
Why XIRR Works Better Than CAGR in case of SIP
Compounded annualised growth rate (CAGR) works only for a single investment made once and held for a defined period. Most investors do not follow this pattern.
Money goes in every month (SIP), sometimes comes out through systematic withdrawal plans (SWPs) or redemptions, and the dates vary. CAGR cannot handle these irregularities because it assumes a clean, fixed timeline. XIRR, on the other hand, reads the exact date and amount of every cash flow and tells you your actual return based on how you invested. It is a far more personalised number. Most importantly, it shows what you actually earned, not what the fund delivered in theory.
Where XIRR Really Helps: SIPs, SWPs and Staggered Investing
If you run SIPs, XIRR is the only sensible way to measure returns. Every instalment is invested at a different price (net asset value, or NAV) and on a different date, so the final performance depends on this staggered flow of money. The same applies to SWPs, where small sums are withdrawn regularly. Even if you do multiple lump sums at different times, XIRR pieces it all together into one annualised return that actually reflects your journey, not just the start and end values.
When CAGR Still Works?
CAGR works well when you invest once and hold throughout, for instance, a single lump sum invested for years. But the moment there is a second cash flow, big or small, CAGR loses meaning.
SIPs, SWPs, staggered lump sums, partial redemptions — all of these require XIRR.
Limitations Investors Should Keep in Mind
XIRR is only as accurate as the dates and entries you put in. Incorrect sequences, missing entries, or large one-time inflows/outflows can distort the result. It also assumes reinvestment at the same rate, which may not always be true. For very short periods or highly volatile patterns, even XIRR can look odd.
To sum up, for most mutual fund investors, especially SIP investors, XIRR is the cleanest and most practical way to measure returns. CAGR has its place, but only for pure lump-sum investments with no movement. XIRR tells your actual story and helps you track whether you are on track to meet your goals.
