XIRR stands for Extended Internal Rate of Return – the single annualised return that accounts for the exact size and date of every cashflow you make. For any investment with uneven inflows and outflows, like a SIP with top-ups and withdrawals, XIRR is the honest number. CAGR simply cannot handle it.
If CAGR answers "how fast did one lump sum grow," XIRR answers the messier, more realistic question: "given money went in and out on all these different dates, what was my true yearly return?"
Why CAGR breaks down for a SIP
CAGR has one rigid assumption: a single amount, invested on day one, left untouched until the end. A SIP violates that on purpose.
Picture a ₹10,000 monthly SIP for 12 months. You have invested ₹1,20,000 in total – but that money did not go in together. Your first instalment was invested for a full year. Your last instalment was invested for barely a month. Each rupee has its own holding period.
Run a plain CAGR on "₹1,20,000 grew to ₹1,30,000 over one year" and you get about 8%. But that treats the whole ₹1,20,000 as if it sat invested for the entire year – which most of it did not. The real return, correctly weighting each instalment by its time invested, is higher. CAGR understates it because it ignores timing entirely.
What does XIRR actually do?
XIRR fixes exactly that. It looks at every cashflow – each instalment, each extra buy, each partial redemption – along with the date it happened, and finds the single annual rate that ties them all together to your current value.
An instalment invested for 11 months is given more weight than one invested for 1 month. A withdrawal is netted off on the day it left. The result is one clean percentage that genuinely represents your annualised return, no matter how irregular your investing was.
The key point: XIRR and CAGR agree when there is only one cashflow. Invest a single lump sum and never add to it, and its XIRR equals its CAGR. The two only diverge once your cashflows become uneven – which is the entire life of a SIP.
CAGR vs XIRR: when to use which
CAGR vs XIRR
A quick way to remember it:
| CAGR | XIRR | |
|---|---|---|
| Number of cashflows | One | Many, on any dates |
| Accounts for timing | No | Yes |
| Right for a lump sum | Yes | Yes (matches CAGR) |
| Right for a SIP | No | Yes |
How is XIRR calculated?
You do not compute XIRR by hand – it is found by trial and error, which is why software does it. The most common way is a spreadsheet:
- List every cashflow with its date. Money you invested is entered as a negative number (it left your pocket); money you redeemed is positive.
- Add your current portfolio value as a final positive figure on today's date.
- Apply the XIRR function in Excel or Google Sheets to those amounts and dates.
Most fund apps, AMC statements and portfolio trackers show XIRR automatically, so in practice you rarely open a spreadsheet. But knowing what sits behind the number tells you why it is the one to trust for a SIP.
Related NYVO guides
- CAGR Full Form: What It Means and How to Read It – the measure XIRR replaces the moment you start investing monthly.
- What is a SIP? How Systematic Investment Plans Work – why a monthly habit produces the uneven cashflows XIRR is built for.
- SIP vs Lumpsum: Which Actually Wins in Indian Markets? – comparing the two fairly means measuring each with the right return.
CAGR is fine for a lump sum and misleading for everything else. If you invest even a little every month, XIRR is the number that tells you the truth – and it is worth glancing at yours at least once a year.
