What is XIRR? Why Your Mutual Fund Returns Look Wrong (And How to Read Them Correctly)
You've been running a ₹10,000/month SIP for 3 years. Your app shows "XIRR: 14.3%." But when you look at the actual numbers — invested ₹3.6 lakh, current value ₹4.45 lakh — the gain is ₹85,000, which is about 23.6% in absolute terms over three years. That doesn't immediately look like it squares with an annual rate of 14.3%. Are the returns wrong? Is the app lying?
No — and understanding why requires knowing the difference between CAGR and XIRR, and why only one of them is meaningful for SIP investments.
What CAGR is and when it's useful · What XIRR is and why it exists · Why CAGR doesn't suit SIPs · A worked example showing both calculations · Where to find your XIRR · When to use which metric
CAGR: Useful for a Single Investment, Not Suitable for Multiple Dated Cash Flows
CAGR (Compound Annual Growth Rate) answers: if ₹X invested today becomes ₹Y in N years, what was the annual growth rate? It assumes a single investment at the start and a single redemption at the end.
Formula: CAGR = (Final Value / Initial Value)^(1/years) − 1
This works perfectly for lumpsum investments. But a SIP has dozens of different investment dates, each with a different amount of time invested. Your January instalment has been in the fund 36 months; your December instalment has been in for just 1 month. Applying a single CAGR to this portfolio is mathematically incorrect — it treats all your money as if it was invested at the same time.
XIRR: A Suitable Money-Weighted Metric for SIPs
XIRR (Extended Internal Rate of Return) is the standard solution. It calculates the annualised return that makes the net present value of all your cash flows (each monthly investment, plus the final redemption) equal to zero. In plain terms: it finds the single annual return rate that correctly accounts for every investment's actual holding period.
XIRR is a suitable money-weighted return measure for portfolios with cash flows occurring on different dates, such as SIPs, additional investments and redemptions. It's useful for comparing:
- Returns from a lumpsum investment
- Returns from a different SIP in a different fund
- Any other investment option (FD, PPF, real estate)
To compare an SIP fairly with a benchmark, apply the same dated cash flows to the benchmark and calculate a corresponding benchmark XIRR. Comparing your SIP XIRR directly with a point-to-point benchmark CAGR is not an apples-to-apples comparison.
A Worked Example: Why the Gap Exists
The CAGR of 7.3% is misleading because it treats ₹3.6L as if it was all invested on Day 1, three years ago. But your last few instalments have only been invested for a few months — they haven't had time to generate significant returns. XIRR accounts for the money you invested early having earned for longer, and the money you invested recently having barely started, arriving at approximately 14.3% as the annualised money-weighted return for this cash-flow pattern.
Mutual-fund factsheets commonly report point-to-point or trailing scheme returns that assume a single investment, whereas your personal XIRR reflects your own dated cash flows. Your personal XIRR will differ depending on exactly when you invested and how the markets moved during your specific investment period. Neither number is wrong — they're measuring different things.
Where to Find Your XIRR
Many investment platforms display portfolio or scheme-level XIRR. Look for a performance or returns section and verify whether the displayed number is XIRR, CAGR or absolute return. Platform labels and navigation can change over time — for example, Zerodha's Console currently shows portfolio XIRR under Portfolio → Holdings, and other platforms often use similar labels like "Returns" or "Portfolio Performance."
Calculate It Yourself (Excel / Google Sheets)
The Excel XIRR function takes two arrays: dates and cash flows (investments as negative numbers, final value as positive). If you've been investing ₹10,000 on the 5th of each month and your current value is ₹4.45L:
=XIRR(cashflows, dates) where cashflows = {-10000, -10000, ..., 445000} and dates = {5-Jan-2023, 5-Feb-2023, ..., 31-Dec-2025}
XIRR requires at least one positive and one negative cash flow — if you get a #NUM! error, check that your investments are entered as negative and your current value as positive.
When to Use Which Metric
| Metric | Useful For | Usually Unnecessary / Unsuitable For |
|---|---|---|
| XIRR | SIPs and irregular dated cash flows | Usually unnecessary for a simple single-investment/single-redemption case |
| CAGR | Single-investment growth over a period | Multiple contributions/redemptions on different dates |
| Absolute return % | Quick sense of total gain vs investment | Comparing investments of different durations |
- CAGR is accurate for lumpsum investments; XIRR is a suitable money-weighted measure for SIPs and irregular investments
- XIRR accounts for each instalment's actual holding period — CAGR does not
- XIRR reflects the annualised money-weighted return generated by your specific cash-flow history
- XIRR is money-weighted, so the timing and size of your own contributions affect it — a time-weighted return, by contrast, attempts to isolate the fund manager's performance from investor cash-flow timing, which is why your personal XIRR and a fund's published return can legitimately differ
- Never compare your SIP's XIRR directly to a fund's point-to-point CAGR from its fact sheet — they're measuring different things
- Many investment platforms display XIRR in their portfolio or returns section, or you can calculate it yourself with Excel's XIRR function