CAGR vs XIRR – Which Return Metric Should You Use?

CAGR and XIRR are two widely used metrics for measuring investment returns. Understanding when to use each is crucial for accurately evaluating your portfolio performance.

What is CAGR?

CAGR (Compound Annual Growth Rate) measures the mean annual growth rate of an investment over a period longer than one year. It assumes a single investment and a single redemption, growing at a steady rate each year. It's the simplest way to express how much an investment grew on an annualized basis.

What is XIRR?

XIRR (Extended Internal Rate of Return) calculates the annualized return for investments with multiple cash flows at irregular intervals. If you invest via SIP, make additional purchases, or do partial redemptions, XIRR gives a more accurate picture of your actual returns.

Comparison Table

When to Use CAGR

• You made a single lumpsum investment and want to know the annualized return
• You're comparing the performance of two funds or indices over the same period
• You want a quick, easy-to-understand return metric

When to Use XIRR

• You have SIP investments with monthly contributions
• You made additional investments or partial withdrawals at different times
• You want to know the true return on your actual cash flows

The Bottom Line

Use CAGR for quick comparisons of lumpsum investments. Use XIRR for your actual portfolio where you've invested through SIPs or made multiple transactions. For most retail investors in India who invest via SIP, XIRR is the more relevant and accurate metric.