Stock Market · Mutual funds, deeper

CAGR vs IRR

Mutual fund returns are reported as CAGR (Compounded Annual Growth Rate). But if you're investing via SIP, adding money monthly, CAGR misrepresents your actual returns. IRR (Internal Rate of Return) is what you actually earned.

CAGR

CAGR assumes a single lumpsum investment growing at a constant annual rate.

Formula: CAGR = (End value / Start value)^(1/years) − 1

Example: ₹1 lakh in 2018 becomes ₹2 lakh in 2024 (6 years).

CAGR = (2,00,000 / 1,00,000)^(1/6) − 1 = 12.25%

The SIP problem

If you SIP ₹10,000/month for 10 years, you invest ₹12 lakh total. Final value: ₹22 lakh.

Naive CAGR = (22/12)^(1/10) − 1 = 6.2%

This is misleading because most of your money was invested in the last few years, not the full 10 years.

IRR. The right measure for SIPs

IRR accounts for the timing of each cashflow. For the same SIP scenario, IRR might show 11-13%. Much closer to the actual fund performance.

> Fund websites report CAGR (assuming lumpsum). Your actual SIP return (XIRR) is usually different, sometimes higher, sometimes lower, depending on when prices were rising vs falling during your contribution period.

When CAGR matters

• Comparing funds for lumpsum returns
• Calculating long-term equity returns
• Setting expectations from index returns

When IRR matters

• Measuring YOUR actual SIP returns
• Comparing different cashflow patterns
• Real-world investor experience

Takeaway. CAGR assumes lumpsum investment; IRR accounts for the timing of multiple cashflows. SIP investors should use IRR/XIRR to measure their real returns. Fund websites usually quote CAGR. Your SIP experience may differ.