XIRR vs CAGR: when to use which
Why CAGR falls short for SIPs and other cash flows spread across multiple dates.
CAGR needs exactly two things: one beginning value and one ending value, each on its own date. The moment money moves in or out more than once — a SIP, a second lump-sum top-up, a partial withdrawal — CAGR no longer has a well-defined answer. Forcing one anyway doesn’t throw an error; it just quietly gives you the wrong number.
Why CAGR can’t handle multiple cash flows
Say you invest ₹1,00,000 today, then invest another ₹1,00,000 exactly a year later. Two years after your first investment, the combined pot has grown to ₹2,50,000.
Treat the ₹2,00,000 total as if it were all invested on day one, over the full 2 years, and CAGR comes out to 11.80%. But the second ₹1,00,000 only had 1 year to grow, not 2 — the correct annualised rate, found by weighting each rupee by the actual time it was invested, is 15.83%. The naive CAGR understates the real return by 4 full percentage points.
| Method | Result |
|---|---|
| Naive CAGR (treats both instalments as invested on day one) | 11.80% |
| Correct XIRR (each instalment on its actual date) | 15.83% |
What XIRR does differently
XIRR takes every cash flow — each investment as a negative amount, each withdrawal or final redemption as a positive amount — on its actual date, and finds the single annualised rate that makes the present value of all of them balance to exactly zero. Money invested later in the timeline is automatically given less time to compound in that calculation, which is precisely what a CAGR-style shortcut can’t do.
This is exactly why a SIP needs XIRR, not CAGR — every monthly instalment is its own cash flow on its own date. It’s also why this site’s XIRR Calculator asks for a dated list of transactions instead of the single amount-and-duration fields every other calculator uses: the shape of the input has to match the shape of the problem.
Find the annualised return for cash flows that happen at irregular dates.
When to use which
Use CAGR when there really is just one investment made at one point in time — a lumpsum, a fixed deposit, a single stock bought and held. The moment there’s more than one cash flow date on either side — multiple contributions, a mid-way top-up, a partial withdrawal — XIRR is the only one of the two that actually answers the question correctly, because it’s built to handle exactly that shape of problem. The CAGR vs. absolute return article covers the simpler single-cash-flow case; the CAGR Calculator is the right tool once that’s genuinely all you have.
All figures are indicative and for educational purposes only — not financial advice.
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