For a SIP, use XIRR. CAGR assumes one amount went in on day one and stayed there, while a SIP adds a new instalment every month. That is the whole CAGR vs XIRR choice: if all your money started on one date, use CAGR, and if it went in on many dates, use the number that counts each date. The CAGR printed on a fund's factsheet is the first kind, and your SIP is the second.
The same SIP, three different "returns"
Take a SIP of ₹10,000 a month for 36 months in a fund that grows a steady 12% a year. You invest ₹3.6 lakh and it becomes about ₹4.31 lakh. The fund is invented, so every figure can be checked by hand.
- Absolute return: 19.7%. It ignores time completely.
- "CAGR" worked out as (4.31 ÷ 3.6) over three years: 6.2%. This is the common mistake.
- XIRR: 12.0%. This matches the fund, which grew 12% a year.
The 6.2% is wrong because the average instalment was invested for only about 1.5 years, not three. Your first ₹10,000 worked for three years, and your last worked for one month. Treating all ₹3.6 lakh as if it had been sitting there since day one makes the return look half of what the fund delivered.
Same fund, same CAGR, very different SIP returns
The fund's own CAGR over those three years can sit at 12.0% while your SIP return lands almost anywhere, because it depends on what the market did when each instalment went in. Here are three invented NAV paths, each ending exactly where a steady 12% a year would end:
| Path of the fund's NAV | Fund CAGR | SIP XIRR | Absolute return |
|---|---|---|---|
| Steady 12% a year | 12.0% | 12.0% | 19.7% |
| Falls 25% in year one, then recovers | 12.0% | 26.9% | 47.6% |
| Rises 30% in year one, then crawls | 12.0% | 6.9% | 11.1% |
In the second row your early instalments bought units cheaply during the fall, so the SIP does far better than a lump-sum investor would. In the third row you bought most units after the rise, and the SIP return is a little over half the fund's CAGR. The fund's CAGR and your XIRR are both correct. They describe different cash flows.
What the factsheet number is
SEBI's master circular for mutual funds (the version updated to 31 March 2024) says scheme performance in advertisements must be shown as CAGR for the past 1, 3 and 5 years and since inception. It adds point-to-point returns on a standard ₹10,000 investment, so both figures describe one amount invested at the start of the period. XIRR does not appear in that circular. So a fund's published CAGR is a lump-sum figure by design, and a SIP investor who sets it against their own XIRR as if one beat the other is comparing different things.
If you want to judge whether your SIP did well, compare it with another SIP over the same dates, such as the same monthly amount into a Nifty 50 index fund. Another lump-sum CAGR will not do that job.
When XIRR itself misleads
XIRR annualises, and annualising short periods inflates the result. A SIP of ₹10,000 a month for just three months, in a fund that rises 5% over those months, earns ₹995 on ₹30,000. That is a 3.3% gain, but the XIRR shows 21.2%. Run the same fund over six months and it shows 10.3%.
So ignore the XIRR of any SIP younger than about a year. It also says nothing about how much money you made. The 26.9% in the table above sits on ₹3.6 lakh invested, which produced a gain of ₹1.71 lakh. Read XIRR next to the rupee gain, and read absolute return on its own only when your goal is a fixed amount by a fixed date.
CAGR vs XIRR: which one for which situation
CAGR fits one amount held for a known period with nothing added or withdrawn, such as a lump sum in a fund or a fixed deposit that you left alone. XIRR fits anything with several dated cash flows: a SIP, a top-up, a partial withdrawal, a mix of all three. Absolute return is fine for periods under a year, where annualised numbers swing wildly.
If your fund app shows only a plain percentage gain on your SIP, that is the absolute return. Put your instalment dates and current value into the XIRR calculator to get the annualised figure. For a lump sum, the CAGR calculator is the right tool, and the SIP calculator projects what a monthly amount can become.
Sources
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