Quick answer
CAGR measures the smoothed annual return on a single lumpsum; XIRR handles multiple cash flows on different dates, like SIPs. Here's when to use each.
Compound Annual Growth Rate tells you the single annual rate at which one lumpsum would have grown from its start value to its end value over a period. It smooths out the bumps along the way, expressing the whole journey as one steady yearly figure. CAGR is ideal when you invested once and want a clean, comparable annual return — but it assumes a single inflow and a single point of measurement.
XIRR (extended internal rate of return) is built for the realistic case where money goes in and out on different dates — monthly SIPs, top-ups, partial withdrawals. It finds the single annual rate that ties all those dated cash flows together to your current value. Because it accounts for both the size and the timing of each flow, XIRR is the right measure for an SIP or any portfolio you've funded in instalments.
If you run an SIP and apply CAGR to it, you'll overstate or distort the return, because CAGR assumes the whole amount was invested on day one. In reality your later instalments have been invested for only a short time. XIRR fixes this by weighting each contribution by how long it was actually invested, giving a figure that reflects what you really earned. So for staggered investing, reach for XIRR, not CAGR.
Both are annualised percentages, which makes them easy to compare across investments — but only when you compare like with like. Use CAGR to compare lumpsum outcomes and XIRR to compare cash-flow-heavy ones such as SIPs. Beware very short periods, where annualising a brief run can produce a dramatic-looking number that won't persist. And remember both look backwards: a past XIRR or CAGR is not a promise of future returns.
The simple rule: one investment, one date in and one date out, use CAGR; many investments on many dates, use XIRR. Spreadsheets and most investment statements can compute XIRR for you, so you rarely need to do it by hand. Knowing which measure applies stops you from comparing a lumpsum's CAGR against an SIP's XIRR as if they were the same thing — a common mistake that flatters or unfairly punishes one of them.
CAGR is the smoothed annual return on a single lumpsum invested once; XIRR finds the annual return when money goes in and out on different dates, such as an SIP. XIRR accounts for the timing of each cash flow, CAGR does not.
Use XIRR for an SIP, because it weights each instalment by how long it was actually invested. Applying CAGR to an SIP distorts the result by assuming the whole amount was invested on day one.
No — both are backward-looking measures of what an investment has already done. A past figure is not a promise of future performance.
Want to know the true return on your SIPs and lumpsums? Write to the firm and we'll work out the right measure for your portfolio.