CAGR, XIRR, and which one your returns actually need

If you have ever compared your own returns against a fund's advertised number and found they disagree, this is usually why. They are often not measuring the same thing.

The two questions

CAGR answers: what steady annual rate would have taken this from A to B?

It assumes one amount went in at the start and nothing moved until the end.

XIRR answers: given money going in and out on specific dates, what annualised rate reconciles all of it?

Each cash flow is weighted by how long it was actually invested, measured in days.

When CAGR is wrong

Suppose you run a SIP of ₹10,000 a month for a year and end with ₹1,30,000.

You might reason: I put in ₹1,20,000, I have ₹1,30,000, that is 8.3%. Or you might feed ₹1,20,000 and ₹1,30,000 into a CAGR calculator over one year and get the same 8.3%.

Both are wrong, and in the same direction.

Your first instalment was invested for twelve months. Your last was invested for one. On average your money was invested for about six and a half months, not twelve. Earning ₹10,000 on money that was only there for half a year is a much better result than 8.3% a year.

Run the actual cash flows through XIRR and the answer is closer to 15–16%. Nearly double. The difference is not a rounding discrepancy; it is the entire point of the measure.

When CAGR is right

CAGR is the correct tool when there genuinely was a single amount held throughout:

• You bought ₹2,00,000 of a fund in 2019, added nothing, and it is worth ₹3,40,000 now
• You want to compare two funds' published multi-year performance
• You are looking at an index level in 2015 versus today

In those cases XIRR would give you the same answer, because with two cash flows and no intermediate activity the two formulas are algebraically equivalent.

A worked comparison

Same money, same period, different question.

	Amount	Date
Invested	₹1,00,000	1 Jan 2023
Added	₹50,000	1 Jul 2023
Value	₹1,90,000	1 Jan 2025

Naive total return: ₹40,000 gain on ₹1,50,000 invested, so 26.7%. Over roughly two years. Sounds like about 13% a year.

CAGR treating it as ₹1,50,000 → ₹1,90,000 over 2 years: 12.55%. But this is wrong, because the second ₹50,000 was not there for two years — it was there for eighteen months.

XIRR: 13.70%. The second instalment gets credit only for the time it was actually invested, which raises the implied rate.

The gap here is about a percentage point. On a SIP running for a decade with irregular top-ups, the gap between naive arithmetic and XIRR is routinely several percentage points.

The trap in short periods

One thing XIRR shares with CAGR: both annualise, and annualising a short period produces figures that look absurd because they are.

A 10% gain over one month annualises to more than 200% a year. That is arithmetically correct and practically meaningless — nobody should expect it to repeat eleven more times. Treat any annualised figure from a period shorter than a year as a curiosity rather than a result.

What neither one tells you

Both measures answer how much, and neither answers at what risk.

Two investments can share a CAGR of 14% where one moved smoothly and the other halved twice along the way. If you might have needed the money during one of those falls, they were not remotely equivalent, and no return measure will tell you that.

In practice

• Money in and out on different dates → XIRR
• One amount, one period, nothing in between → CAGR
• Comparing your SIP against a fund's advertised return → use XIRR on your own cash flows, because the fund's published figure is a point-to-point number that does not describe your entry timing