When we invest money, we all want to know how much return we are actually getting. But just looking at how much your money has grown is not enough. You need to understand how to measure it properly. Two common ways are CAGR and XIRR. Let’s understand both in simple words.
[Download sheet to find your XIRR or CAGR here [Make a copy to use this sheet]
What is CAGR? (Compounded Annual Growth Rate)
CAGR tells you how much your investment has grown every year, on average, if it had grown at a steady rate.
Useful when:
- You invest a lumpsum amount once.
- You hold it without adding or withdrawing money in between.
Example:
You invested ₹1 lakh. After 5 years, it becomes ₹2 lakh.
CAGR will tell you the steady % growth per year that doubled your money. It tells you the constant annual rate at which your investment grew, assuming the earnings also grew each year (that’s the “compounding” part!).
It’s like saying: “If my money had grown at a fixed rate every year, what would that rate be?”
Limitation of CAGR:
CAGR assumes one-time investment. It cannot handle multiple investments, withdrawals, or SIPs.
What is XIRR? (Extended Internal Rate of Return)
XIRR is like a supercharged version of CAGR. It handles multiple investments, SIPs, SWPs and irregular cash flows.
Useful when:
- You are investing monthly (SIP)
- You are investing at random times
- You withdraw money in between, randomly or systematically
How it works:
XIRR looks at the amount, date, and frequency of all your cash flows and gives you a realistic annual return, considering all those movements. It’s calculated easily in Excel or financial apps.
Why do we need XIRR
XIRR is the only accurate way to know your actual returns, interest paid in products like SIP, EMI, SWP, Bonds/SDI monthly payouts.
CAGR vs XIRR — What’s the Difference?
| Feature | CAGR | XIRR |
|---|---|---|
| Investment | One-time | Multiple / irregular |
| Accuracy | Good for lumpsum | Best for real-life cases |
| Calculation | Simple formula | Needs Excel / App |
🎯 Which One Should You Use?
| If… | Use… |
|---|---|
| Lumpsum – Investment / Withdrawal [like FD] | CAGR |
| You did SIP / multiple entries [EMI, SWP, Bonds, etc] | XIRR |
Final Takeaway
CAGR is great for understanding growth over time when you invest once and forget.
XIRR is better when your investments happen over time, like SIPs or multiple additions.
Both help you see the real performance of your money.
- Download sheet to find your XIRR or CAGR here [Make a copy to use this sheet]