What is the difference between XIRR and CAGR?

CAGR (compound annual growth rate) assumes a single lump sum investment at the start and a single exit at the end. It cannot handle multiple cashflows. XIRR (extended internal rate of return) handles any schedule of cashflows and solves for the annualized rate where the net present value of all flows equals zero. SIP returns must use XIRR because contributions happen every month at different times.

Why does my SIP absolute return differ from the XIRR?

Absolute return is simply total value divided by total invested, minus one. It ignores when each rupee was invested. XIRR weights earlier contributions more heavily because they had more time to compound. For a 5 year SIP of 10,000 per month that grows to 8,10,000, the absolute return is 35 percent but the XIRR is roughly 12 percent annualized because the average rupee was invested for only 2.5 years.

How does Excel compute XIRR?

Excel XIRR uses Newton-Raphson iteration. It starts with a guess (default 10 percent), computes the net present value of all cashflows at that rate, and adjusts the rate until NPV reaches zero within a tolerance of 0.000001. The formula is NPV = sum of Ci divided by (1 plus r) raised to ((di minus d0) divided by 365), where Ci is cashflow i, di is the date of cashflow i, and d0 is the first date.

Which return measure do mutual fund apps display?

Zerodha Coin and Groww both display XIRR as the primary return for SIP investments and point-to-point CAGR for lump sum investments. SEBI Mutual Fund Regulations 1996 require fund houses to disclose returns in specific formats depending on the holding period, with CAGR mandated for periods above 1 year and absolute returns for shorter durations.

When does XIRR overestimate or underestimate true returns?

XIRR is a money weighted return, so it overweights the periods when you invested more. If most of your contributions happened at a market bottom and the market rallied, XIRR will show a very high number that flatters the fund manager unfairly. Conversely, a fund that performed well for most of the period but crashed at the end will show depressed XIRR. Time weighted returns, used by professional fund benchmarks, correct for this.

XIRR vs CAGR vs Absolute Returns: Why SIP Numbers Differ (2026 Guide)

CAGR, XIRR and absolute returns computed on a 5 year SIP of 10,000 per month. Learn why Zerodha and Groww show XIRR and how Newton-Raphson iteration actually works.

A 5 year SIP of 10,000 per month accumulates 6,00,000 of contributions. If the ending value is 8,10,000, the absolute return looks like 35 percent, which sounds excellent. The CAGR, treating 6 lakh as if invested as a lump sum, works out to 6.18 percent. The XIRR, which is the honest money weighted annualized return, is 12.04 percent. Three different numbers for the same investment. Only one is economically meaningful when you committed money over time.

Quick Answer

Absolute return is total gain divided by total invested. CAGR is the annualized rate for a single entry and single exit. XIRR is the annualized rate for any schedule of cashflows, computed by Newton-Raphson iteration until the net present value of all flows equals zero. For a SIP, XIRR is the correct measure because contributions span multiple dates. CAGR is correct only for a lump sum investment held to a single exit.

The Three Formulas

Absolute Return

Absolute Return = (Ending Value / Total Invested) - 1

Example: 8,10,000 / 6,00,000 - 1 = 0.35 = 35%

Useful only for holding periods below 1 year. Ignores time, ignores the shape of cashflows.

CAGR (Compound Annual Growth Rate)

CAGR = (Ending Value / Starting Value)^(1/n) - 1

Where n = number of years

Example: (8,10,000 / 6,00,000)^(1/5) - 1
       = (1.35)^0.2 - 1
       = 1.0618 - 1 = 6.18%

Valid for lump sum investments with a single entry and single exit. Misleading for SIPs, staggered purchases, or any plan with multiple cashflows.

XIRR (Extended Internal Rate of Return)

Find rate r such that:

SUM of [Ci / (1 + r)^((di - d0)/365)] = 0

Where:
Ci = Cashflow on date i (negative for investment, positive for redemption)
di = Date of cashflow i
d0 = Date of first cashflow
r = Annualized rate (solved iteratively)

XIRR is the only measure that correctly handles contributions made at different times. Every major mutual fund app in India (Zerodha Coin, Groww, Kuvera, ET Money, Paytm Money) displays XIRR for SIPs.

Try our XIRR calculator with your own cashflow dates.

Worked Example: 5 Year SIP of 10,000 per Month

Contributions of 10,000 on the first of each month for 60 months starting April 2021. Assumed ending value on 1 April 2026: 8,10,000.

Cashflow Schedule (Abbreviated)

Date	Cashflow	Type
2021-04-01	-10,000	SIP 1
2021-05-01	-10,000	SIP 2
2021-06-01	-10,000	SIP 3
...	...	...
2026-02-01	-10,000	SIP 59
2026-03-01	-10,000	SIP 60
2026-04-01	+8,10,000	Redemption

Total invested: 60 times 10,000 equals 6,00,000. Final value: 8,10,000. Gain: 2,10,000.

Computing the Three Returns

Metric	Value	Meaning
Absolute Return	35.00 percent	Total gain divided by total invested
CAGR	6.18 percent	If 6 lakh had been invested as lump sum
XIRR	12.04 percent	Actual annualized return on the cashflow schedule

The XIRR of 12.04 percent is the honest answer. Each SIP instalment had a different holding period: the April 2021 SIP had 5 full years of growth, the March 2026 SIP had only 1 month. The average rupee was invested for 2.5 years, not 5, which is why XIRR (12.04 percent) is roughly double the CAGR (6.18 percent) in this example.

Newton-Raphson Iteration Step by Step

XIRR has no closed form solution. The equation is nonlinear in r, so numerical iteration is required. Newton-Raphson is the standard method used by Excel, Google Sheets, and most financial libraries.

Step 1: Start with a guess

Common starting guess: 10 percent (0.10).

Step 2: Compute net present value at the guess rate

NPV(0.10) = SUM of Ci / (1.10)^((di - d0)/365)

For 60 outflows of -10,000 and 1 inflow of +8,10,000
at the dates given, NPV at r = 0.10 works out to approximately +10,000

Positive NPV means the guess rate is too low: the future inflow is valued more than it should be. Increase the rate.

Step 3: Adjust using the derivative

r_new = r_old - NPV(r_old) / NPV'(r_old)

Where NPV'(r) is the derivative of NPV with respect to r.

Each iteration brings r closer to the rate where NPV equals zero. Excel converges to 0.000001 tolerance within 5 to 20 iterations for typical SIP schedules.

Step 4: Convergence

After iterating:

Iteration	r Guess	NPV at r
0	10.00 percent	+10,140
1	11.50 percent	+3,220
2	11.95 percent	+410
3	12.04 percent	+2
4	12.04 percent	0 (converged)

The XIRR of 12.04 percent is the rate at which the discounted sum of all 60 outflows equals the discounted inflow of 8,10,000.

Why Absolute Return Misleads for SIPs

A common investor mistake: seeing 35 percent absolute return on a 5 year SIP and assuming the fund delivered 35 percent per year. In reality, 35 percent over 5 years is closer to 6.18 percent per year (the CAGR under lump sum assumption). The 12.04 percent XIRR is meaningfully higher because early SIPs had more time to grow, and investor cashflow timing matters.

Conversely, apps that display only absolute returns can understate SIP performance when the holding period is short. A 6 month SIP with 5 percent absolute return is actually delivering roughly 18 percent XIRR because the average investment age is only 3 months.

Time Weighted vs Money Weighted Returns

XIRR is a money weighted return (MWR). It rewards the fund for the periods when you had more money invested, and penalizes when you had less. A fund manager has no control over when an investor contributes or redeems, so MWR is not a fair manager performance measure.

Time weighted return (TWR) strips out the effect of investor cashflows. It measures pure fund performance by computing holding period returns between each cashflow date and chaining them. CFA Institute GIPS standards mandate TWR for fund manager reporting.

Return Type	Best Used For
Absolute	Short holding periods under 1 year
CAGR	Single lump sum entry and exit
XIRR (money weighted)	Your personal SIP or staggered investment
Time weighted	Comparing fund managers apples to apples

When XIRR Overstates the Real Picture

XIRR mechanics favour early contributions in a rising market. Consider this sequence: 3 years of flat returns with 10,000 per month contributed, then a sudden 30 percent rally in month 37. The XIRR will look impressive because the rally happened after the base was built up. But if you had started 3 months earlier and the same rally happened, the XIRR changes significantly.

The same principle works in reverse. If you make large contributions right before a drawdown, XIRR will print depressed numbers even if the long run fund performance is fine. This is why reviewing rolling CAGR charts alongside XIRR gives a more honest read.

SEBI Disclosure Rules for Fund Houses

SEBI Mutual Fund Regulations 1996 mandate specific return disclosure formats in scheme information documents and fact sheets.

Holding Period	Required Disclosure
Less than 1 year	Absolute returns only
1 to 3 years	CAGR for each year plus since inception CAGR
3 years and above	CAGR for 1, 3, 5, and since inception periods
SIP returns	Hypothetical XIRR on a monthly SIP for the stated period

AMFI guidelines further require fund fact sheets to show SIP XIRR alongside lump sum CAGR, so investors can see both money weighted and time weighted perspectives.

Checking Your Own XIRR in Excel

Excel has a built in XIRR function. Usage:

=XIRR(values, dates, [guess])

Where:
values = range of cashflow amounts (negatives for investments, positives for redemption)
dates = range of corresponding dates
guess = optional starting rate (default 10%)

Example cell formula if your cashflows are in column B rows 2 to 62, dates in column A rows 2 to 62:

=XIRR(B2:B62, A2:A62, 0.10)

Returns the annualized rate as a decimal. Multiply by 100 to get the percentage.

Run the same computation instantly on our XIRR calculator or pair it with the SIP calculator for scenario planning.

Disclaimer

This article is informational only. The author is not a Chartered Accountant or SEBI registered advisor. Mutual fund selection and return analysis require context on risk profile, liquidity, and tax impact. Consult a Chartered Accountant or SEBI registered investment adviser for personalised advice.

Byline: By Aniket Nigam. Verified 2026-04-15 against CFA Institute GIPS standards for return calculation, SEBI Mutual Fund Regulations 1996 Schedule VI disclosure format, Microsoft Excel XIRR function documentation, and AMFI best practices guidelines. Methodology: XIRR computed via Newton-Raphson iteration on a 60 instalment SIP schedule, cross-checked with the Excel XIRR result.