XIRR Explained: The Correct Way to Calculate SIP Returns

Why CAGR is misleading for SIP and how XIRR gives the true picture of your investment performance.

Why CAGR Does NOT Work for SIP

CAGR assumes a single lump sum investment at the beginning. But SIP has multiple investments on different dates. Using CAGR for SIP drastically underestimates your actual returns because it ignores that later installments have been invested for a shorter duration.

What is XIRR?

XIRR (Extended Internal Rate of Return) is the correct method to calculate returns on SIP investments. It accounts for the exact date and amount of each cash flow (SIP installment and redemption), giving you the true annualized return on your investment.

XIRR finds the rate (r) that satisfies:

0 = Sum of [ Cash Flow(i) / (1 + r)^((Date(i) - Date(0)) / 365) ]

Where each SIP installment is a negative cash flow and redemption is positive

CAGR vs XIRR — A Practical Example

Using CAGR (Incorrect)

Total invested: ₹12,00,000 (₹10,000/month × 10 years)

Current value: ₹23,23,391

CAGR = (23,23,391 / 12,00,000)^(1/10) - 1

CAGR = 6.83%

This is WRONG — makes SIP look like FD returns!

Using XIRR (Correct)

Same investment: ₹10,000/month × 10 years

Same current value: ₹23,23,391

XIRR accounts for each monthly installment date

XIRR = 12.00%

This is the TRUE return on your SIP!

Why Such a Big Difference?

CAGR treats ₹12L as if it was all invested on Day 1. But only ₹10,000 was invested on Day 1.

Your last SIP installment was invested for just 1 month, not 10 years. CAGR ignores this.

XIRR weights each installment by its actual investment duration, giving the true picture.

The average holding period of SIP installments is about half the total period, not the full period.

XIRR is the industry standard for SIP return calculation used by all mutual fund platforms.

How to Calculate XIRR for Your SIP

List all cash flows

Each SIP installment as negative (outflow) and current value as positive (inflow)

Note exact dates

The date of each SIP installment and today's date for current value

Use Excel/Google Sheets

=XIRR(cash_flows, dates) function gives you the annualized return directly

Or check your fund statement

Most mutual fund platforms now show XIRR directly in your portfolio dashboard

Key Takeaway: Always use XIRR to evaluate your SIP returns. CAGR significantly underestimates SIP performance and can lead to wrong conclusions about your investment. All professional financial platforms use XIRR as the standard metric.