By Ojasvi Malik, VMFS Research Desk · ARN 317605
The Number That Looks Right — And Lies to Your Face
Open any mutual fund fact sheet. You will see a return figure — 18.4% CAGR, 22.1% CAGR, sometimes with a star next to it. Investors look at that number, compare it against their portfolio app, find a mismatch, and assume they picked wrong funds.
They did not pick wrong funds. They are comparing incompatible metrics.
CAGR and XIRR are not two ways to say the same thing. They measure fundamentally different phenomena. Using CAGR to evaluate a SIP portfolio is like using a thermometer to measure blood pressure — you get a number, it means nothing.
This post walks through both metrics with actual math, worked examples, and the uncomfortable truths that fact sheets do not volunteer.
Part 1: CAGR — What It Actually Measures
Compound Annual Growth Rate answers one specific question: if a single investment grew from value A to value B over N years, what was the equivalent annual growth rate?
The Formula
CAGR = (Ending Value / Beginning Value)^(1/N) − 1
Where N = number of years (can be fractional).
One start value, one end value, one time delta.
Worked Example 1: ₹10,000 Lumpsum
You invest ₹10,000 in a large-cap fund on 1 July 2021. On 1 July 2024 (exactly 3 years), the value is ₹15,209.
CAGR = (15,209 / 10,000)^(1/3) − 1
= (1.5209)^(0.3333) − 1
= 1.1499 − 1
= 0.1499
= 14.99% ≈ 15%
That 15% CAGR is accurate and meaningful here. One cash flow in, one cash flow out. Clean.
When CAGR Is Valid
CAGR requires exactly two cash flow points: initial investment and final redemption. It assumes the entire corpus was deployed at T=0 and withdrawn at T=N. No additions. No withdrawals. No SIPs.
The moment you have more than two cash flows — monthly SIP installments, additional lumpsum top-ups, partial redemptions — CAGR becomes mathematically inapplicable.
Part 2: Why CAGR Lies for SIP Investors
Say you ran a ₹5,000/month SIP for 24 months. Total invested: ₹1,20,000. Final value: ₹1,38,450.
An unsophisticated calculation: (1,38,450 / 1,20,000)^(1/2) − 1 = 7.5% CAGR.
That number is wrong. Your last installment — paid on month 24 — was only deployed for one month before you checked the value. Your first installment ran for 24 months. Every installment has a different deployment duration. Treating all ₹1,20,000 as if it sat invested for 2 full years violates the core premise of CAGR.
The actual return depends on when each rupee entered the fund. CAGR ignores timing entirely.
Part 3: XIRR — The Right Tool
XIRR (Extended Internal Rate of Return) is the IRR generalized for irregular cash flow timing. It finds the annualized discount rate at which the Net Present Value (NPV) of all cash flows equals zero.
The Conceptual Formula
Given cash flows C₀, C₁, C₂, ... Cₙ at dates d₀, d₁, d₂, ... dₙ:
NPV = Σ [ Cᵢ / (1 + r)^((dᵢ − d₀)/365) ] = 0
XIRR solves for r — the annual rate that satisfies this equation. There is no closed-form algebraic solution; Excel/Sheets uses Newton-Raphson iteration to converge on r.
Key conventions:
- Cash outflows (investments, SIP debits) are negative values
- Cash inflows (redemptions) are positive values
- The final "cash flow" is your current portfolio value as a positive number (notional redemption)
- Dates must be actual calendar dates, not period numbers
Worked Example 2: ₹5,000/month SIP for 24 Months
SIP starts 1 August 2022, runs to 1 July 2024 (24 installments), final value on 1 July 2024 is ₹1,38,450.
Your XIRR spreadsheet:
| Date | Cash Flow (₹) | |------|--------------| | 01-Aug-2022 | -5,000 | | 01-Sep-2022 | -5,000 | | ... (continues) | ... | | 01-Jun-2024 | -5,000 | | 01-Jul-2024 | +1,38,450 |
In Excel or Google Sheets:
=XIRR(B2:B26, A2:A26)
Result: approximately 14.2% XIRR — very different from the 7.5% CAGR figure calculated earlier.
The discrepancy exists because CAGR underestimated returns: later installments had less time to grow, so the fund had to perform harder to produce ₹1,38,450. XIRR correctly accounts for this and reports higher annualized returns.
Step-by-step in Google Sheets:
- Column A: Enter each SIP date (format: DD/MM/YYYY, consistent)
- Column B: Enter each SIP amount as negative (e.g., -5000)
- Last row of column A: Current date or redemption date
- Last row of column B: Current portfolio value as positive
- In an empty cell: =XIRR(B2:B[last], A2:A[last])
- Format result cell as Percentage with 2 decimal places
If XIRR returns #NUM! error: check that at least one cash flow is positive (final value row) and dates are sorted ascending.
Part 4: Absolute Return — The Short-Horizon Trap
For investments held less than one year, CAGR itself is misleading. Annualizing a 6-month return inflates it by exponentiation.
₹1,00,000 invested. Value after 6 months: ₹1,06,000.
Absolute Return = (1,06,000 − 1,00,000) / 1,00,000 = 6% — accurate for this horizon.
If you CAGR-annualize it: (1.06)^(1/0.5) − 1 = (1.06)^2 − 1 = 12.36% — misleading for a 6-month hold.
Rule: use absolute return for horizons below 12 months. CAGR for single lumpsum over 1+ years. XIRR for everything with multiple cash flows.
Part 5: TWRR vs MWRR — What Your Statement Actually Shows
Time-Weighted Rate of Return (TWRR) neutralizes the effect of cash flow timing. It chains together sub-period returns regardless of when money entered or exited. This is what fund managers and fact sheets report — because it measures fund performance independent of investor behavior.
Money-Weighted Rate of Return (MWRR) is mathematically equivalent to XIRR. It weights each sub-period return by the amount of money actually deployed during that period. This is what your portfolio shows — because it measures your actual return, shaped by when you chose to invest.
Critical insight: A fund's TWRR (fact sheet CAGR) and your MWRR (portfolio XIRR) can diverge by 3–7 percentage points even in the same fund over the same period. This is not a data error. It is a mathematical consequence of your specific investment timing.
Example: fund delivers 18% CAGR over 3 years. You started SIP when the market peaked, paused during corrections, added lumpsum near peak again. Your XIRR: 11%. Same fund, genuinely different experience.
When to Use Which Metric
| Scenario | Correct Metric | Why | |----------|---------------|-----| | One-time lumpsum, no additions/withdrawals | CAGR | Single entry/exit, clean | | Horizon below 12 months (lumpsum) | Absolute Return | Annualizing sub-1yr distorts | | Monthly SIP, any duration | XIRR | Multiple cash flows at different dates | | SIP + additional lumpsum top-ups | XIRR | Irregular cash flow timing | | Partial redemptions over time | XIRR | Both inflows and outflows | | Comparing two funds (manager skill) | TWRR / CAGR | Strips out investor timing effect | | Measuring your actual portfolio returns | XIRR / MWRR | Accounts for your timing | | Checking if you personally made money | XIRR | Only metric that tells the truth |
Part 6: Why Your Portfolio XIRR Differs from Fund CAGR
Three independent reasons — all operating simultaneously.
1. Timing mismatch. Fund CAGR is measured from a fixed start date. Your SIP started on a different date, possibly at a different valuation.
2. Cash flow weighting. CAGR treats the corpus as monolithic. Your SIP spreads capital over time. Bull markets in early SIP months boost your XIRR above fund CAGR. Bear markets in early months depress it.
3. Loads, exit loads, stamp duty. Fact sheet returns are often shown on NAV-to-NAV basis. Your actual XIRR includes exit loads on units redeemed within 1 year (typically 1%), plus 0.005% stamp duty on each purchase.
Put together: do not panic if your XIRR is 2–4 points below the fund's advertised 5-year CAGR. It is expected. What matters is whether your XIRR clears your personal financial goal rate — typically inflation + 3–4%.
What Advisors Won't Tell You
Q: Why do fund fact sheets always show CAGR and not XIRR?
Because CAGR flatters performance. SEBI mandates point-to-point CAGR reporting for standardization, but the practical effect is that fund houses pick 1Y/3Y/5Y windows after strong performance periods. Your actual SIP XIRR rarely matches. No fact sheet voluntarily shows the investor-experience-adjusted return.
Q: My app shows "returns" as a percentage. Is that XIRR?
Depends on the app. Groww, Zerodha Coin, and most AMC apps now show XIRR for portfolio-level returns — but individual fund cards often show absolute return or CAGR. Always check the methodology footnote. If the app does not disclose it, assume CAGR on lumpsum and XIRR on SIP, then verify manually.
Q: ELSS funds show "3-year CAGR" — but my SIP lock-in means each installment unlocks separately. Which metric applies?
XIRR, always. ELSS SIP has each installment locked for 36 months from its own investment date. Your actual return is an MWRR across installments with different unlock dates. The 3-year CAGR on the fact sheet is irrelevant to your experience.
Q: A distributor showed me 25% CAGR on a fund going from ₹10 NAV to ₹45 NAV. Should I buy?
Run the date math first. NAV going from ₹10 to ₹45 over 10 years is a CAGR of:
(45/10)^(1/10) − 1 = (4.5)^(0.1) − 1 ≈ 16.3%
Not 25%. The distributor likely calculated absolute return (350%) or cherry-picked a short window. Always verify the period start and end dates independently.
Q: Can XIRR ever be lower than absolute return?
Yes, when deployment is fast and returns are moderate. If you invested a lumpsum for 8 months and got 10% absolute return, XIRR annualizes it to roughly 15%. But if your SIP ran for 36 months with flat markets in early months, your XIRR can be lower than the simple (ending/invested − 1) absolute figure because XIRR penalizes the time your capital waited under-deployed.
The One Number That Matters
Stop chasing fund CAGR. It measures fund manager skill in isolation. Your goal is different: you need to know if your money, deployed on your schedule, is compounding fast enough to reach your financial target.
That is XIRR. Only XIRR.
Set up the spreadsheet once. Update the final row (current date + current value) every six months. Track your XIRR against your target rate — for long-term equity goals, 12–14% post-expense XIRR is the benchmark that serious financial plans are built on.
If your XIRR is consistently below 10% in an equity fund over 5+ years, the fund is not the problem — the entry timing, SIP gaps, and panic-exit behavior are. XIRR exposes all of it. That is why it is the only honest metric.
This article is for educational purposes only and does not constitute investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. SEBI-registered investment advisor ARN 317605.
By Ojasvi Malik, VMFS Research Desk · ARN 317605
Ojasvi Malik
VMFS Research Desk · ARN 317605
Building Vijay Malik Financial Services — research-first mutual fund discovery for retail investors who want institutional-grade analysis without the gatekeeping.
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