What Are CAGR and XIRR? How Mutual Fund Returns Are Calculated
Evaluating mutual fund returns requires different mathematical models depending on whether money was invested in a single lump sum or through periodic cash flows like SIPs.
The two primary metrics mandated by SEBI and AMFI for reporting mutual fund performance are CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return).
Quick Answer
CAGR measures the smoothed annualized rate of return for a single, one-time lump-sum investment held over more than one year. XIRR calculates the annualized internal rate of return for multiple, staggered cash flows occurring on different dates, making it the standard metric for SIPs and SWPs.
Compound Annual Growth Rate (CAGR)
CAGR answers the question: "At what constant annual rate did my initial lump sum grow from start to finish?"
The Mathematical Formula:
$\text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{N}} - 1$ (where $N$ represents the investment duration in years).Practical Example:
- Initial Lump Sum (18 Oct 2021): ₹1,00,000 - Final Value (18 Oct 2026): ₹2,10,000 - Holding Period ($N$): 5 Years - Calculation: $\text{CAGR} = \left( \frac{2,10,000}{1,00,000} \right)^{0.2} - 1 = (2.10)^{0.2} - 1 = 1.1599 - 1 = \mathbf{16.00\%}$The investment compounded at an annual rate of 16.00% per year over 5 years.
Extended Internal Rate of Return (XIRR)
CAGR cannot accurately evaluate a SIP because cash flows enter the scheme on multiple dates. Units purchased in Year 1 compound for 5 years, while units purchased in Year 4 compound for only 1 year.
XIRR solves this by finding the precise discount rate ($r$) that equates the net present value (NPV) of all cash outflows (investments) to the present value of the current portfolio:
$\sum_{i=1}^{n} \frac{C_i}{(1 + r)^{\frac{d_i - d_1}{365}}} = 0$
(Source: AMFI Performance Measurement Standards for Mutual Fund Portfolios).
Summary Comparison Table
| Metric | Primary Use Case | Cash Flow Structure | Reporting Standard |
|---|---|---|---|
| CAGR | Point-to-Point Fund Comparisons & Lump Sums | Single initial investment, single terminal value | Factsheet 1Y, 3Y, 5Y, 10Y benchmarks |
| XIRR | SIP, STP, SWP, and Personal Folio Performance | Multiple inflows/outflows across varying dates | Account statements, CAS returns, portfolio trackers |
You can compare how different compounding rates shape your financial timeline using our SIP vs Lumpsum Calculator.