What It Means
CAGR (Compound Annual Growth Rate) measures the annualized return of a single investment made on one date and held until another, smoothed out as if it grew at a steady rate every year. XIRR (Extended Internal Rate of Return) measures the annualized return when money moved in or out on multiple different dates at irregular intervals, exactly the situation a SIP creates.
How It Works
CAGR only needs a start value, an end value, and the time between them, which is why it works cleanly for a lump sum but breaks down for a SIP, where every instalment goes in on its own date and grows for a different length of time. XIRR solves that by finding the single annualized rate that, applied to every individual cash flow on the date it actually happened, would make them all balance out to the fund's current value. There's no clean one-line formula for XIRR the way there is for CAGR; it's solved by iteration, the same way Excel's XIRR function works, which is exactly what SIP calculators and your mutual fund statement use behind the scenes.
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1
- Ending Value
- What the investment grew to
- Beginning Value
- What you originally invested
- Number of Years
- The exact holding period, in years
Example
A lump sum of ₹1,00,000 that grows to ₹1,76,000 in exactly 5 years has a CAGR of about 12%. A 5-year SIP of ₹10,000 a month into the same fund might show an XIRR of around 13%, not because the fund performed differently, but because of exactly when each instalment went in and how long it had to grow.
Warning
A common mistake is quoting a fund's CAGR when describing SIP returns. Since SIP money goes in on different dates, CAGR isn't the right number for it; XIRR is what SIP calculators and account statements are actually built around.