XIRR vs CAGR — Which One Should You Use for SIP Returns?
TopFund Research
TopFund
CAGR works for lump sum investments, but SIPs need XIRR because money goes in on different dates at different NAVs. Here's the difference with an example.
CAGR assumes a single lump sum invested once and withdrawn once. But a SIP puts money in every month at a different NAV — CAGR can't handle that. XIRR (Extended Internal Rate of Return) can, because it accounts for the exact date and amount of every cash flow.
When to Use Which
| Investment Type | Correct Metric | Why |
|---|---|---|
| Lump sum | CAGR | Single entry, single exit date |
| SIP | XIRR | Multiple entries on different dates at different NAVs |
| SIP + lump sum top-ups | XIRR | Irregular cash flows of different sizes |
A Common Mistake
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Many investors add up their total SIP returns and apply the CAGR formula directly — this overstates or understates real returns because it ignores that each installment had a different holding period. A SIP started 5 years ago has 60 individual cash flows, each with its own effective duration; XIRR solves for the single rate that makes all of them net out to your current value.
Every mutual fund platform, including TopFund, shows XIRR (not CAGR) for SIP investments for exactly this reason — it's the only mathematically correct way to measure returns on staggered investments.
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