CAGR is not the right measure for a SIP. CAGR (compounded annual growth rate) annualizes the growth of a single lump-sum investment between two dates. A SIP invests a new amount every month, so each installment has a different holding period. XIRR, which uses the amount and date of every cash flow, gives the true annual return on a SIP.
Key Takeaways
- CAGR = (Ending value / Beginning value)^(1/n) – 1, where n is the number of years; it fits one lump-sum investment.
- A SIP is many small purchases on different dates, so CAGR on the total invested understates the real return.
- XIRR annualizes returns across irregular cash flows and is the standard measure for SIP, SWP and mixed transactions.
- A SIP calculator projects a future value from an assumed return; it does not measure past performance.
- Use absolute return for holding periods under one year.
Evaluating the performance of your investment is crucial to know your progress towards your financial goals. The right way to measure returns depends on how the money went in: as one lump sum or as regular installments.
Compounded annual growth rate (CAGR) is a widely used and well-accepted return measure for any mutual fund investments. This guide explains what CAGR measures, where it works well, and why SIP investors usually need XIRR instead.
What is Compounded Annual Growth Rate (CAGR)?
CAGR, or compounded annual growth rate, is the steady yearly rate at which an investment would have had to grow to move from its starting value to its ending value over a given number of years. You can calculate CAGR using the following formula:
CAGR = [(Ending value/Beginning value)1/n – 1] X 100
Let’s understand this with an example. Let’s say you have invested INR 25,000 into a mutual fund which you are redeeming after 5 years of investment. Let’s assume the fund value at the time of redemption is INR 50,000. Let’s calculate CAGR for this investment.
CAGR = [(Ending value/Beginning value)1/n – 1] X 100
= [(50,000/25,000)1/5 – 1] X 100
= 14.87%
CAGR gives an accurate annualized figure for a single investment made on one date, but it smooths out the ups and downs along the way, so it says nothing about volatility. Hence, CAGR is mainly used in measuring the performance of lump sum mutual fund investment. Online CAGR calculators apply the same formula if you prefer not to work it out by hand.
What is the CAGR calculator?
CAGR calculator is one example of an online tool that annualizes the growth between a starting value and an ending value over a set number of years. Such calculators apply the same formula:
CAGR = [(Ending value/Beginning value)1/n – 1] X 100.
It is quite simple to use the CAGR calculator online. You need to follow a few simple steps to calculate the CAGR of your mutual fund investment using the CAGR calculator:
- Open an online CAGR calculator.
- Enter your investment details – total investment, final maturity value, and duration of investment.
- Click on the ‘calculate’ option to know the CAGR of your investment.
The result shows how fast a lump sum has grown each year on average, which helps you check progress toward a financial goal. CAGR is also a fair way to compare two lump-sum investments held for different lengths of time, because it converts both to an annual rate.
CAGR is therefore the standard measure for a lump-sum mutual fund investment. It does not suit a SIP, because CAGR assumes one investment on one date, while every SIP installment is a new purchase made on a different date.
When it comes to SIP investments, the extended internal rate of return (XIRR) is the right measure, because XIRR accounts for the amount and the date of every installment and withdrawal. A SIP calculator, by contrast, projects what a series of future installments could grow to.
What is a SIP calculator?
A SIP calculator is an online tool that estimates the future value of equal monthly installments using the future value of an annuity formula:
FV = P X [{(1+r) n– 1} / r] X (1+r).
In this formula,
FV – Future Value or fund value of your investment.
P – Amount of each SIP installment.
r – Estimated/expected rate of return (per month).
n – Number of installments.
A SIP calculator does not measure how an investment has actually performed; it projects a future value from the inputs you give it. To use one, enter the basic details of the plan.
This includes the amount of monthly SIP installment, period of investment, and the investment strategy or the expected rate of return to calculate the return on your SIP investment.
Because the projection depends entirely on the assumed rate of return, a SIP calculator is best used to compare scenarios, such as a cautious and an optimistic return, against your goals and risk profile. It does not tell you which fund will deliver that return.
Using the SIP calculator, you can input the target amount or the goal amount to know the approximate amount of SIP investment that you need to make every month depending on the type of fund you choose.
In short: use CAGR to judge a lump-sum investment, XIRR to judge the actual return on a SIP, and a SIP calculator to estimate what future installments could be worth.
Why Does CAGR Understate SIP Returns? A Worked Example
Consider a SIP of INR 5,000 invested on the first day of every month from January 2021 to December 2025: 60 installments, or INR 3,00,000 in total. Suppose the units are redeemed on 1 January 2026 for INR 4,00,000. The figures below are an illustration, not the record of any real fund.
| Method | How it treats the money | Annual return shown |
|---|---|---|
| CAGR on total invested | Assumes all INR 3,00,000 was invested on day one and held for five years | About 5.9% |
| XIRR | Counts each INR 5,000 installment from its own date | About 11.4% |
The gap is large because the last installments were invested for only a few months. Applying CAGR to the SIP total pretends every rupee was invested for the full five years, so the return looks roughly half of what the investor actually earned.
CAGR vs XIRR vs Absolute Return: Which Should You Use?
| Measure | Best for | Accounts for timing of each cash flow? |
|---|---|---|
| Absolute return | Point-to-point return over a holding period of less than one year | No |
| CAGR | A single lump-sum investment held for more than one year | No (one start date, one end date) |
| XIRR | SIPs, SWPs, top-ups and partial redemptions | Yes |
According to Quantum AMC’s investor guide, absolute return suits holding periods generally under a year, CAGR suits a lumpsum investment, and XIRR is the appropriate measure when money goes in or comes out through SIP, SWP or lumpsum transactions on different dates. For a lump sum held for several years, see this guide to lumpsum investment in mutual funds.
How to Calculate the XIRR of a SIP in Excel
Microsoft Excel’s XIRR function returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. It needs at least one negative and one positive value.
- In column A, list the date of every SIP installment and, in the last row, the date on which you are valuing or redeeming the investment.
- In column B, enter each installment as a negative number (money paid out, for example -5000).
- In the last row of column B, enter the current value or redemption amount as a positive number.
- In an empty cell, type =XIRR(B2:B62, A2:A62), adjusting the ranges to your data.
- Format the cell as a percentage. The result is the annualized return on the SIP.
If Excel shows a #NUM! error, check that the cash flows include both negative and positive values.
What a SIP Calculator Can and Cannot Tell You
A SIP calculator uses the formula M = P × ({[1 + i]^(n) – 1} / i) × (1 + i), where M is the maturity amount, P the monthly installment, n the number of installments and i the periodic (monthly) rate. The annual rate should be converted to a monthly rate by compounding, (1 + annual rate)^(1/12) – 1, rather than divided by 12. For a 12% annual assumption, that gives about 0.95% a month, as Groww’s SIP calculator page explains.
On that basis, INR 5,000 a month for 60 months at an assumed 12% a year would be projected at roughly INR 4,05,500. That figure is a projection only: mutual fund returns are not guaranteed, and the actual result depends on market movements and fund costs. Lower costs leave more of the return with the investor; this guide on how to reduce mutual fund investment costs explains how. To see how raising the installment each year changes the projection, read about the step-up SIP calculator.
Common Mistakes When Measuring SIP Returns
- Using CAGR on the SIP total: it understates the return, as the example above shows.
- Comparing a fund’s published CAGR with your own SIP return: a point-to-point lump-sum figure and a SIP return measure different things, because the SIP return depends on when each installment went in.
- Dividing the annual rate by 12 in a SIP calculator: this slightly overstates the projected value.
- Annualizing a SIP after a few months: for periods under a year, absolute return is more meaningful.
For broader context on percentage-based measures, see why mastering percentages matters, and for planning installments toward a target, read how a mutual fund SIP calculator helps you reach financial goals.
Frequently Asked Questions
Is CAGR relevant for SIP investments?
CAGR is not the right measure for a SIP’s own return, because CAGR assumes a single investment on one date. CAGR is still useful for reading a fund’s lump-sum performance, but the return on your SIP should be measured with XIRR.
What is a good XIRR for a SIP?
There is no single good XIRR figure. A SIP’s XIRR is best compared with the XIRR a SIP in the fund’s benchmark or in similar funds would have earned over the same dates, since equity, hybrid and debt funds carry different levels of risk and return.
Can XIRR be negative?
Yes. XIRR is negative when the current value of the SIP is lower than the money invested, after allowing for the timing of each installment, which can happen after a market fall.
What is the formula for CAGR?
CAGR = (Ending value / Beginning value)^(1/n) – 1, where n is the number of years. Multiply by 100 to express it as a percentage. For example, INR 25,000 growing to INR 50,000 in five years is a CAGR of about 14.87%.
Why is my SIP return different from the fund’s 5-year CAGR?
A fund’s 5-year CAGR assumes a lump sum invested five years ago. In a SIP, later installments were invested for less time and at different prices, so the SIP’s XIRR can be higher or lower than the fund’s 5-year CAGR.
