XIRR vs CAGR vs Absolute Return: What Each Measures

Two numbers describe the same investment. The fund's page says the scheme returned 14.2% a year. Your account statement says you made 9.8%. Nobody has made a mistake.

They're answering different questions.

Almost every explainer on this subject stops after the useful half: CAGR for a lump sum, XIRR for a SIP. That's correct and it leaves out why your statement and the advertisement can never quite agree. The reason is written down, in a SEBI circular that tells a fund exactly how it may present performance, and the word XIRR does not appear anywhere in it.

What is CAGR?

CAGR is the steady annual rate that would take one amount to another over a given period, assuming a single investment and no money added or removed in between.

The formula is closed, meaning you can solve it directly. Take the ending value, divide by the beginning value, raise it to the power of one over the number of years, subtract one. ₹1,00,000 becoming ₹2,00,000 over five years is a CAGR of 14.87%.

The word "steady" is doing quiet work there. CAGR describes a smooth path the investment almost certainly did not take. A fund that fell 30% in year one and doubled in year four can carry the same CAGR as one that drifted upward every year. It is a summary, not a history.

Its usefulness is that it has exactly one answer. Give two people the same start value, end value and dates, and they cannot disagree. That property is why a regulator can require it.

What is XIRR?

XIRR is the single annual rate at which every payment you made, discounted from the date you made it, adds up to what your holding is worth today.

A SIP is not one investment. It's thirty or sixty of them, each with its own date and its own length of exposure. The instalment paid last month has had a month to work. The one from 2021 has had four years. XIRR handles that by asking a different question: what constant annual rate, applied to each payment for the exact number of days it was invested, would produce the value you're holding now?

That question has no closed formula. It's solved by iteration. The software guesses a rate, discounts every cash flow at that rate, checks whether the total lands on zero, adjusts, and repeats until it's close enough. Excel and Google Sheets both do this, and both accept an optional starting guess for the same reason: sometimes the search doesn't converge and the function returns an error rather than a number.

Two consequences follow. Different tools can return slightly different XIRRs from identical cash flows, because they stop iterating at different tolerances. And an XIRR quoted to two decimal places is claiming more precision than the method delivers.

Why your statement and the fund's advertisement disagree

Because only one of those two numbers is regulated, and it isn't the one on your statement.

SEBI's Master Circular for Mutual Funds sets out, at clause 13.3, exactly how a scheme's performance may be advertised. The requirements are specific:

Clause	What it requires
13.3.1.1	Performance advertised as CAGR for the past 1 year, 3 years, 5 years and since inception
13.3.1.2	Point-to-point returns on a standard investment of ₹10,000, in addition to the CAGR
13.3.1.3	Figures computed from the last day of the month-end preceding the advertisement
13.3.1.4	It must say whether the performance shown is the regular or the direct plan, footnoted with the fact that the two carry different expense structures
13.3.1.5	If the same fund manager did not run the scheme for the whole period shown, that must be footnoted

Read that list again and notice what it describes. Every item standardises the scheme's own record so that two funds can be compared on the same basis. None of it describes an investor.

The word XIRR appears nowhere in that code. Neither does IRR. The circular runs to eight pages on advertisement rules and mentions CAGR four times, so the absence isn't an artefact of a short document. SEBI regulates the number the fund shows the public. The number your platform shows you is a courtesy, not a filing.

That's the whole answer to the mismatch. The advertised CAGR is a property of the scheme, identical for every investor in it. Your XIRR is a property of your cash flows: when you started, what you paid, whether you paused during a fall, whether you took money out for a wedding. Two people in the same fund on the same day hold different XIRRs, and both differ from the advertisement.

The rules for young schemes, which almost nobody quotes

A mutual fund scheme less than six months old may not advertise past performance at all.

Clause 13.3.2 is short and absolute. Under six months, no past performance is to be provided. Between six months and a year, the scheme shows a simple annualised growth rate for the past six months, and only then does CAGR apply.

The logic is easy to see once stated. Annualising a short run multiplies whatever happened in it. A fund up 8% in its first quarter is not a 36% fund, and a rule that let it say so would reward launching in a good quarter.

There's one carve-out, at 13.3.3. Overnight funds, liquid funds and money market funds may advertise by simple annualisation of yields where a figure exists for at least 7, 15 and 30 days, and only where that does not present a misleading picture. Those are cash-parking instruments held for days, so a rule built for equity horizons would leave them unable to say anything at all.

Where absolute return fits

Absolute return is the plain percentage change between what went in and what it is worth now, with no reference to how long it took.

₹1,00,000 becoming ₹2,00,000 is a 100% absolute return whether that took two years or twenty. Ignoring time is its weakness and also the one thing it is good for. It is the only one of the three that cannot be inflated by annualising a short run, which is why it is the honest figure for a holding a few months old.

SEBI requires it beside the CAGR. Clause 13.3.1.2 says point-to-point returns on a standard investment of ₹10,000 shall also be provided in addition to the scheme's CAGR, and gives the reason in the clause itself: "in order to provide ease of understanding to retail investors". The regulator's own position is that a CAGR on its own is hard to read, and a plain rupee outcome on a fixed amount belongs next to it.

That gives three figures answering three questions.

Figure	The question it answers	Does timing change it?	Required by SEBI
Absolute return	How much did this grow altogether?	No	Yes, as a point-to-point return on ₹10,000
CAGR	At what steady yearly rate did the scheme grow?	Only the start and end dates	Yes, at 1, 3, 5 years and since inception
XIRR	What did my own money earn, given when I paid it in?	Every payment date	No, it appears nowhere in the code

Read down the last column and the shape of the confusion becomes clear. The two figures a fund must publish describe the scheme. The figure your platform actually shows you describes you, and no rule requires it at all.

Which number answers which question

CAGR answers how the fund did. XIRR answers how you did. The gap between them is a record of your own timing.

That framing settles most of the confusion. If you want to compare two schemes, you need a measure that ignores investor behaviour, and CAGR is it. If you want to know what your money earned, you need one built on your actual payment dates, and that's XIRR.

The two coincide in exactly one situation: a single investment, a single valuation, nothing paid in or taken out in between. Then XIRR has one cash flow to weight and collapses into the CAGR formula. Every additional instalment pulls them apart.

Which means comparing your XIRR against the advertised CAGR tells you less than it appears to. A lower XIRR does not mean the fund disappointed. It usually means a good deal of your money arrived recently and has not had time to compound. Our SIP explainer covers how instalment timing shapes the outcome, and the SIP calculator shows the same effect in figures.

One more thing follows from clause 13.3.1.4. Because an advertisement must state whether it shows the regular or the direct plan, the CAGR you're reading may not be the CAGR of the plan you hold. Same portfolio, same manager, different expense ratio, different published return. What that difference costs over a full holding period is worked out in direct versus regular mutual funds.

What this post deliberately does not cover

It doesn't tell you which fund to buy, which scheme category suits you, or what return to expect. Those are questions for a SEBI-registered investment adviser who can see your position, and no return metric answers them.

It doesn't cover the tax treatment of what you redeem. Returns and post-tax returns are different numbers, and capital gains rules turn on your holding period and asset class, which is a separate question from how the return was measured. That's covered separately in capital gains tax, short-term versus long-term.

It doesn't cover rolling returns, alpha, standard deviation, Sharpe ratio or any of the risk-adjusted measures. Those describe the shape of a return, and its size is only part of what they measure, so they deserve their own treatment.

And it doesn't cover how to compute XIRR by hand, because you can't sensibly. It's an iterative solve, and the correct tool is a spreadsheet function or the figure your registrar already publishes.

Frequently asked questions

What is the difference between XIRR and CAGR?

CAGR measures the growth of a single amount between two dates. You put money in once, it becomes something else, and CAGR is the steady annual rate that would connect those two figures. XIRR measures the return on money paid in across many dates, which is what a SIP actually is. It finds the single annual rate at which every instalment, discounted from the day it was paid, adds up to what the holding is worth now. The practical difference is that CAGR ignores when money arrived and XIRR is built entirely around it. For a lump sum held untouched they give the same answer, because there is only one date to consider.

Which is better for SIP returns, XIRR or CAGR?

XIRR, and not by a small margin. A SIP is a series of payments made on different dates, and each instalment has been invested for a different length of time. The one you paid last month has had a month to work; the one from four years ago has had four years. CAGR has no way to represent that, so applying it to a SIP either overstates or understates the result depending on whether markets rose early or late in the period. XIRR weights each instalment by how long it was actually invested, which is why fund platforms and registrars report it on your statement. Note that this is about measuring returns. Which investment to choose is a different question entirely.

Why does my statement show a different return from the fund's advertisement?

Because they measure different things and only one of them is regulated. SEBI's Master Circular for Mutual Funds requires performance advertisements to show CAGR for the past one, three and five years and since inception, computed from the last day of the month before the advertisement. That figure describes the scheme, and it is the same for every investor in it. The number on your statement is usually XIRR, which describes your own cash flows: when you started, how much you paid, whether you paused, whether you redeemed. Two investors in the same fund can hold very different XIRRs on the same day, and both can differ from the advertised CAGR.

Can XIRR and CAGR ever be the same?

Yes, and the condition is precise. They match when there is exactly one investment and one valuation, with nothing paid in or taken out between them. In that case XIRR has only one cash flow to weight, so it reduces to the CAGR formula. Any additional instalment, any partial redemption, any switch between schemes pulls the two apart. This is also why comparing your XIRR against a fund's advertised CAGR tells you very little about the fund. The gap between them is mostly a record of your own timing, not a verdict on the fund manager.

Should I check XIRR or absolute return?

It depends on how long you have held the investment and whether you paid in more than once. Absolute return is the plain change between what you put in and what it is worth, and because it makes no claim about time it cannot flatter a short holding. That makes it the safer figure in the first months. XIRR becomes the more useful one as soon as the holding is a year or more old and money went in on several dates, because it weights each payment by how long it was actually invested. SEBI requires a fund to publish a point-to-point return on a standard ₹10,000 alongside its CAGR, on the stated ground that this is easier for retail investors to read, so the regulator treats the absolute figure as a companion to the annualised one and not a replacement.

Is XIRR the same as IRR?

XIRR is the version of the internal rate of return that handles irregular dates. Plain IRR assumes cash flows arrive at even intervals, one per period, which almost never describes a real investment account. XIRR takes the actual date of every payment and discounts each one by the exact number of days it was invested. Neither has a closed formula. Both are solved by iteration, meaning the software guesses a rate, checks whether the discounted cash flows balance, and adjusts until they nearly do. That is why the answer can shift slightly between tools, and why a spreadsheet can occasionally fail to produce one at all.

In summary

The useful distinction is not that one metric is more accurate. Both are exact answers to the questions they ask. It's that CAGR was built to be comparable between funds, which is why SEBI can require it and did, and XIRR was built to be true to one person's payments, which is why no regulator specifies it and your platform reports it anyway. When the two disagree, the gap is measuring you.

Sources

• SEBI Master Circular for Mutual Funds, clause 13.3 as consolidated to 31 March 2024, for the CAGR advertisement requirement at 13.3.1.1, the ₹10,000 point-to-point disclosure at 13.3.1.2, the month-end computation date at 13.3.1.3, the regular-versus-direct statement at 13.3.1.4, the fund manager footnote at 13.3.1.5, the six-month and twelve-month rules at 13.3.2, and the overnight, liquid and money market carve-out at 13.3.3
• Association of Mutual Funds in India, for scheme-level performance disclosure and the published expense ratios that separate regular and direct plans
• SEBI Investor Education portal, for the investor-facing explanation of scheme performance reporting
• The observation that XIRR and IRR appear nowhere in the advertisement code is our own reading of the circular text, checked against a CAGR search on the same extracted document so a nil result could not be an extraction failure