When reviewing your investments, you will often come across terms like CAGR and XIRR. These aren’t just technical jargon – they are two of the most used investment return metrics for beginners.
While they may appear similar, each serves a distinct purpose and is suited to different investment situations. Want these investment metrics explained? In this article, let’s understand what they mean, how they differ, and when you should use each.
What is XIRR?
XIRR stands for Extended Internal Rate of Return. It measures the return on investments (ROI) when you invest or withdraw money at different times. XIRR is based on the NPV (Net Present Value) of all dated cash flows. It is considered an appropriate metric for:
- SIPs (Systematic Investment Plan)
- SWPs (Systematic Withdrawal Plan)
- Multiple lump-sum investments
- Any portfolio with irregular cash flows.
But why? As an investor, you must realise that each SIP instalment enters the market on a different date and stays invested for a different period. Thus, each instalment produces a different return. Now, XIRR combines all these individual returns and reports “one annualised rate of return” for the entire portfolio.
For more clarity, let’s study an example:
- Mr A contributes ₹5,000 every month for 36 months.
- The value of his portfolio (without returns) becomes ₹1.8 lakh (₹5,000 x 36 months).
- Now, the return cannot be calculated as a simple lump-sum return.
- Reason? That’s because the first instalment stayed invested for 36 months, the second for 35 months, and so on.
- Interestingly, the last investment stayed invested for only 1 month.
- Thus, in the instant case, the ideal metric is XIRR.
- It finds the single rate of return at which the:
- Present value of all investments/ SIPs
equals (=)
- The current value of the portfolio (₹1.8 lakh).
This single rate is reported as the XIRR and represents the actual annualised return of Mr A’s SIP.
How to Calculate XIRR?
XIRR can be calculated using the following formula:
XIRR =NPV (Cash Flow, r)Initial Investment x 100
Where,
- “NPV (Cash Flows, r)” represents the Net Present Value of all cash flows (investments and withdrawals) discounted at the rate “r”.
- “r” is the discounting rate.
- “Initial investment” is the total amount invested.
Now, XIRR represents the rate that makes the present value of all investments (say SIPs) equal to the present value of all inflows (including the final portfolio value). This rate is then expressed as an annual percentage.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It shows how much your investment grew “on average” each year over a set period. CAGR assumes that the growth rate was the same every year, even though actual returns may vary. Usually, this metric is used for lump-sum investments, where you:
- Invest a single principal amount at the beginning
and
- Remain invested throughout the tenure.
Be aware that CAGR ignores any extra money you add or withdraw later. In such cases, the appropriate metric for portfolio performance measurement is XIRR.
How to Calculate CAGR?
CAGR is calculated using the following formula:
CAGR = (Final ValueInitial Value) 1n– 1
Where,
- “Final Value” is the value of the investment at the end of the period.
- “Initial Value” is the amount you invested at the beginning of the investment period.
- “n” represents the number of years the investment was held.
Please note that the expression (Final Value/Initial Value) shows how many times your money grew in total. And when you raise this number by (1/n), it converts the total growth into an annual rate. Lastly, subtracting 1 removes the starting principal and leaves only the yearly return.
XIRR vs CAGR: Major Differences Between These Metrics
XIRR and CAGR are both portfolio performance measurement metrics, but they serve different purposes. Okay, so what’s the key difference between XIRR and CAGR? It is the type of investment pattern they are designed for:
- CAGR works for a single lump-sum investment
and
- XIRR works for investments made at different times (such as SIPs or irregular contributions).
To further improve your understanding, check out the detailed XIRR vs CAGR comparison below:
| Basis | XIRR | CAGR |
|---|---|---|
| Approach | Calculates the return based on all investments and withdrawals across their actual dates. | Calculates the return using only the starting value and ending value of one investment. |
| Calculation Approach | Works with irregular cash flows and varying investment amounts. | Works with a single investment made at one point in time. |
| Present Value (PV) | PV of every cash flow is calculated. | Does not consider the time value of money; uses only start and end values. |
| Cash Flows Considered | Includes all inflows and outflows throughout the investment period. | Includes only the initial investment and final portfolio value. |
| Suitability | Suitable for:
|
Suitable only for:
|
| Return Type | Shows the internal rate of return (IRR) | Shows the average annual growth rate |
In Summary, CAGR is Used For One-Time Investments and XIRR for Multiple Cash Flows
So now you know that both XIRR and CAGR are investment return metrics for beginners. Using them, investors can measure the performance of their entire portfolio or a single investment. The main difference between them lies in the calculation approach and suitability of use.
CAGR is mostly used for single investments where additional amounts are neither invested nor withdrawn. In contrast, XIRR is used when there are multiple investments and withdrawals during the investment period (such as SIPs or SWPs). By understanding when to use each metric, you can assess investment performance more accurately.
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XIRR vs. CAGR FAQs
1. Can I calculate my SIP returns using CAGR?
No. CAGR assumes a single investment and ignores multiple contributions. For SIPs, where you invest at different times, XIRR gives a more accurate annualised return.
2. What is the “discount rate” in XIRR?
It is the rate used to bring each cash flow to its present value. Always remember that the farther in the future the cash flow occurs, the more it is “discounted”.
3. Does XIRR make NPV = 0?
Yes. XIRR finds the rate at which the net present value (NPV) of all cash inflows (investments) and cash outflows (withdrawals) is equal to zero. This rate represents the actual annualised return of your portfolio.
4. Can my actual returns vary from CAGR?
Yes, the CAGR only represents the “average” annual growth rate of your investment. It assumes your principal amount grew at a constant rate each year. Thus, there is a possibility that your actual or real returns were different.
5. How to do financial analysis using CAGR and XIRR in 2026?
Both CAGR and XIRR are used to measure a portfolio’s performance. You can use CAGR for single lump-sum investments to understand the average annual growth rate. On the other hand, you can use XIRR for portfolios with multiple investments or withdrawals to determine the annualised return.
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Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
