What Is XIRR in Mutual Funds? Learn How It Differs from CAGR

Imagine a 28-year-old product manager has been running SIPs across eight mutual funds for the last six years. His monthly investments lie between INR 40,000 and INR 55,000, depending on the cash flow. He also adds lump sumps every now and then during market corrections, and redeems small amounts for travel or emergencies.

However, whenever he reviews the portfolio, he notices that one app shows returns at 14%, whereas another shows only 11%. Not only that, but his fund house statements also mention CAGR figures that do not match.

Altogether, it confuses him and makes him wonder how the same investments can yield three different returns. The flaw here, however, lies in measurement. Most platforms show CAGR or absolute returns, which assume a single investment made at one point in time. In this case, this product manager’s investing pattern does not work that way. His money went in on different dates, in different amounts, and came out at different times. To understand the real performance, he needs a metric that reflects how he actually invested.

That is where XIRR comes in. Understanding XIRR vs. CAGR helps investors like this manager see what their mutual fund returns truly represent and avoid drawing the wrong conclusions from misleading numbers.

What Is XIRR and Why Is It Important for Mutual Fund Investors?

XIRR or Extended Internal Rate of Return is a measurement of the annualised return on investments involving multiple cash flows on different dates. It is a popular gold standard among investors for tracking mutual fund investments, for three primary reasons:

• Timing gaps: XIRR factors in the difference between the date of the present investment and the first one, accounting for the time value of the invested amount. So if you invest INR 2000 in January, INR 7500 in April, and INR 10,000 in November, the XIRR calculation would factor in all the gaps.
• Multiple in-and-out flows: It handles both negative cash flows (buys) and positive cash flows (sells/dividends).
• Annualization: It converts the performance into an annual percentage, allowing direct comparison between a 6-month investment and a 2-year investment.

XIRR and IRR (Internal Rate of Return) are closely related metrics. Both measure the net present value of an investment, with the only differentiating factor being the duration of measurement. Unlike XIRR, IRR assumes cash flow across all intervals (for example, exactly every month, every quarter, or every year).

Understanding CAGR: What It Tells You and What It Doesn’t

Unlike XIRR, which is based on complex time intervals, CAGR, or Compounded Annual Growth Rate, is a simpler metric that conveys the annual growth rate of an investment assuming it grew steadily over a specific period. CAGR works best with a single lump-sum investment and no additional cash flows in between.

Benefits of CAGR

Mutual fund investors still value CAGR due to certain benefits. A few things that this metric describes are:

1. The Average Speed of Growth

CAGR strips away the noise of market volatility. If an investment went up 20% one year and down 10% the next, CAGR tells you the single geometric mean return that connects the beginning value to the end value.

2. Growth Efficiency

Because CAGR is an annualized figure, it allows you to compare a 3-year mutual fund performance against a 10-year real estate gain to see which one grew more efficiently on a per-year basis.

3. Future Projections

If you know an asset has a historical CAGR of 12%, you can use that to estimate what your current portfolio might be worth in 5 or 10 years (though past performance is never a guarantee).

Limitations of CAGR

But there are limitations to CAGR that mainly affect retail investors. Here’s what it does not tell mutual fund enthusiasts:

1. Volatility

CAGR is a point-to-point calculation. It only cares about the starting value, the ending value, and the time. Which is why, in two different investment situations,

• Investment A: Grows a steady 10% every year.
• Investment B: Gains 90% in year one and loses 50% in year two. Both might have a similar CAGR, but Investment B was much more unpredictable and riskier.

2. The Impact of Periodic Investments

CAGR assumes a lump-sum investment. It treats the money as if you put it all in on day one and took it all out on the last day. However, it cannot account for SIPs or adding/withdrawing money mid-way, which is where XIRR becomes necessary.

3. Investment Risk

A high CAGR doesn't mean an investment is safe. A speculative cryptocurrency might have a 100% CAGR over two years, while a blue-chip stock has 10%. CAGR tells you how much an investment has grown, but it doesn't tell you how much risk was taken to get there.

Formula and Calculation of CAGR

The CAGR formula measures the annualized growth rate between a start value and an end value. Its formula is:

CAGR = (Ending Value / Beginning Value)^(1/n) − 1

n = the number of years

To calculate CAGR, you need a single beginning amount and a single ending amount. However, most SIPs have multiple purchase dates and cash flows that CAGR does not capture well. This is why the formula for how to calculate CAGR for SIP usually gives you an approximation instead of an exact number.

XIRR vs CAGR: Key Differences Every Investor Should Know

The difference between XIRR and CAGR lies primarily in how they handle time and cash flows. While both are annualised return measures, their applicability differs significantly. Here’s a CAGR vs XIRR comparison table for a quick overview:

These differences help investors direct focus and attention on a fund-relevant metric instead of hit-and-miss practices that take up a huge amount of time.

Also Read: SIP vs Lumpsum: Which Strategy will work for you?

XIRR vs Absolute Return: Which One Should You Trust?

Absolute return is a more basic metric that simply measures the percentage gain or loss between the total invested amount and the current value. The holding period doesn’t matter. It means that if you invested INR 10,000 and it is now INR 12,000, your absolute return is 20%, and it does not matter whether that gain took 1 year or 10 years.

XIRR serves as an upgrade on this by converting returns into annualised figures that also account for time. This makes absolute return vs XIRR comparisons relevant for mutual fund investors tracking long-term performance.

When it comes to which one you should choose, the answer depends on what you want to know. For example, if your measurement is:

Knowing what to look for gives you a considerable edge and helps you take the next investment decisions strategically.

The XIRR Formula

Mathematically, the XIRR formula calculates the specific discount rate that makes the net present value (NPV) of all present cash flows equal to zero. Here’s the formula:

0 = Σ(i=1..N) [ Pi / (1 + r)^((di - d1)/365) ]

Here, the inputs required are:

• Pi: the i-th cash flow (negative for investments/outflows, positive for withdrawals/inflows)
• di: the date of the i-th cash flow
• d1: the date of the first cash flow
• r: the annualized internal rate of return (XIRR)
• N: total number of cash flows

Since these cash flows can occur on irregular dates, the XIRR calculation formula can’t be solved easily by hand. Instead, investors can use tools like Microsoft Excel, built in with the XIRR function. Besides, there are readily available online XIRR calculators embedded with unified finance management platforms for those who prefer an even easier approach.

XIRR Example: How SIP Returns Actually Look

Suppose, Neha starts a 6-month monthly SIP of INR 10,000 in a volatile market. You can use this SIP calculator to see how each installment impacts overall returns, making it easier to track and understand the effect of market fluctuations. Here’s what her action chart looks like:

With this, on July 1, Neha starts calculating SIP returns. This begins with:

1. Absolute Return

Her total investment amount ended up at INR 60,000, and the final value at $63,000. This means:

• Profit: INR 3000
• Absolute return: INR 3000/$60,000 = 5%.

Now, at first, 5% over 6 months seemed okay, but that wasn’t the whole picture. So Neha moved on to the next step.

2. XIRR

Neha ran the specific dates and amounts through the XIRR formula. The result, annualized, closed in on 17-18% (approx). The difference is the result of a changing time-to-value. She didn’t have INR 60,000 working for her for the whole 6 months. Instead:

• Her first INR 10,000 worked for 6 months.
• Her last INR 10,000 worked for only 30 days.
• On average, only about INR 35,000 was at work during this period.

XIRR recognizes that generating an INR 3,000 profit on an average balance of INR 35,000 is much more impressive than doing so on an INR 60,000 lump sum. This 17-18% (approx) is the actual SIP return, since it takes the entire market performance into account.

Common Mistakes Investors Make While Interpreting XIRR

XIRR, despite its accuracy, is not a miracle tool that magically increases the rate of return. Investors need to have a basic idea of the internal math before using this metric. Common mistakes that investors make are:

1. Annualization error: XIRR is an annual rate. If your investment goes up by 2% in 2 days, your app might show an XIRR of 3000%. In reality, that is just a phantom number that autocorrects with time. And actually, the value means that if this growth continued every single day for a full year, you'd have 3,000%.
2. The reinvestment assumption: The math behind XIRR assumes that any money you take out (like a dividend or a partial withdrawal) is immediately reinvested at that same high rate. If your XIRR is 20% and you receive a dividend, the formula assumes that the dividend is also earning 20% elsewhere. But in reality, if you put that dividend into a savings account earning only 4%, your actual wealth will be lower than the XIRR suggests.
3. Misinterpreting negative XIRR in a SIP: Investors often panic when they see a negative XIRR. If you’re thinking a -10% XIRR means you've lost 10% of your total money, you can correct yourself. However, if the market drops sharply just after your latest (and usually largest) SIP installment, the XIRR will plummet because it heavily weights the most recent cash flow. Your absolute return might only be -2%, even if XIRR looks like -10%.
4. Ignoring cash flow signs: XIRR is a direction-sensitive formula. Entering all numbers as positive values in a spreadsheet can cause inaccuracies and cause the formula to return an error or a nonsensical number. You need to mark cash outflows or investments as negative and inflows or returns or current value as positive.

Being aware of and avoiding these mistakes can help you stay ahead of the curve and make good investment decisions. A portfolio tracker like Novelty Wealth can help you track your XIRR rates efficiently alongside other investments in your portfolio, reducing the risk of inaccuracies and errors.

How Novelty Wealth Helps You Track Returns the Right Way

Most investors in 2026 are heavily diversifying their portfolios through multiple SIPs, lump-sum investments, and redemptions across different platforms. Calculating XIRR for each of them manually on the spreadsheets becomes impractical and time-consuming.

A reliable mutual fund portfolio tracker can help you monitor all your holdings in one place, making it easier to evaluate returns and track performance efficiently. Returns are auto-calculated across different funds, and investors can view portfolio-level XIRR instead of dealing with scheme-by-scheme confusion.

More importantly, returns are linked to financial goals rather than shown as isolated percentages. This helps investors focus on progress and alignment instead of chasing numbers.

Conclusion

XIRR provides a more accurate and realistic picture of mutual fund performance for investors who invest over time. CAGR and absolute returns still have limited use cases, but they often misrepresent SIP outcomes. Smart investors focus on understanding return metrics in context and tracking progress toward goals. With platforms like Novelty Wealth, interpreting XIRR becomes simpler, clearer, and far more meaningful than relying on headline return numbers alone.