What is a good CAGR for investments?

A good CAGR varies based on asset class. For equities, a CAGR of 12-15% is considered strong. For fixed deposits, a CAGR of 6-8% is reasonable. Higher-risk assets can have CAGRs above 20%.

Why is XIRR better for SIPs?

XIRR accounts for multiple investments made at different times. This makes it more precise for SIPs, where money is invested periodically rather than as a lump sum. It provides a more realistic return rate.

XIRR vs CAGR: Which one should I use?

If you have a lump sum investment, use CAGR. For SIPs or investments with multiple transactions, XIRR gives a more accurate return estimate. XIRR vs CAGR comparisons show that financial analysts recommend using both for a complete return analysis.

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XIRR vs CAGR: Understanding the Key Investment Metrics

Archana Chettiar
February 14, 2025

Understanding how much your investment grows over time is essential. Two widely used metrics for measuring investment returns are XIRR vs CAGR. Both help investors evaluate performance, but they work differently.

XIRR vs CAGR is a common topic in investing, and understanding them can significantly improve your investment strategy. Professionals in share market advisory often use both metrics to analyze different investment strategies.

CAGR (Compound Annual Growth Rate) is a simple way to measure growth over a specific period, assuming steady returns.

XIRR (Extended Internal Rate of Return) calculates an investment’s annualized return involving multiple cash flows occurring at irregular intervals.

XIRR vs CAGR comparisons become essential when evaluating systematic investments such as SIPs. If you’re wondering how these metrics differ and which one you should use, this article will provide clear explanations, examples, and formulas to help you make informed financial decisions.

What is CAGR?

CAGR stands for Compound Annual Growth Rate, a standard formula used to measure the average annual growth of an investment over a specified period. It smoothens out volatility and provides a single growth rate.

How to Calculate CAGR

CAGR is calculated using the Formula:

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Ending Value (EV) = Final investment value
Beginning Value (BV) = Initial investment value
n = Number of years

Example:

Suppose you invest ₹1,00,000 in a stock, and after 5 years, its value increases to ₹1,80,000.

Using the CAGR formula mentioned above,
EV = ₹1,80,000
BV = ₹1,00,000
and n = 5

CAGR= [(1,80,000/1,00,000)^ ⅕ – 1] x 100

= 12.47%

This means your investment grew at an average rate of 12.47% annually. Alternatively, you can use an online CAGR calculator to find the average rare.

What is XIRR?

XIRR (Extended Internal Rate of Return) is a more flexible method of calculating investment returns, especially when there are irregular cash flows. Unlike CAGR, XIRR accounts for multiple investments and withdrawals over time, making it ideal for SIPs, recurring deposits, and phased investments.

Know More:  SEBI Registered investment advisory |  Stock investment advisory

How is XIRR Calculated?

XIRR is calculated using this formula:

Where

di is the last payment date.
d1 is the 0th payment date.
Pi is the last payment.

Spreadsheet applications like Microsoft Excel have a built-in function to calculate XIRR efficiently. The syntax for the XIRR function is

=XIRR(values, dates)

values – Cash flows linked to specific dates. Negative for investments, positive for returns.
dates – The dates corresponding to each cash flow.
guess (optional) – Estimated return rate; Excel uses a default if omitted.

Example:

Imagine you invest ₹10,000 every year for 5 years. At the end of 5 years, your total investment value grows to ₹70,000. Since investments were made at different times, XIRR vs CAGR comparisons show that CAGR won’t be accurate. Using XIRR in Excel provides an exact return percentage considering each cash flow.

Let’s assume the following dates for the investment:

Year 1: ₹10,000 on 01/01/2020
Year 2: ₹10,000 on 01/01/2021
Year 3: ₹10,000 on 01/01/2022
Year 4: ₹10,000 on 01/01/2023
Year 5: ₹10,000 on 01/01/2024
Value at the end of 5 years: ₹70,000 on 01/01/2025

Using the above formula, the XIRR for the given investment scenario is approximately 11.42%. This means your investment has grown at an annual rate of 11.42% over the 5 years.

Key Differences: CAGR Vs. XIRR

When comparing XIRR vs CAGR, both metrics are commonly used to measure investment growth, but they cater to different types of investments. Understanding their distinctions is crucial for accurately assessing investment performance.

Parameter	CAGR	XIRR
Meaning	Compound Annual Growth Rate calculates consistent growth over time.	Extended Internal Rate of Return, considering fluctuating cash flows.
Calculation	It uses starting and ending values over a set period.	Factors in the precise dates and amounts of investments.
Timing	Assumes a single starting point with no additional inflows.	Takes into account exact cash flow timings.
Inclusion of Cash Flows	Focuses on a single initial investment.	Accounts for multiple, irregular investments over time.
Investment Type	Designed for lump-sum investments without ongoing contributions.	Best for fluctuating investments like SIPs.
Rate of Return	Calculates a constant growth rate, ignoring timing specifics.	Reflects return rates that adjust for timing differences.
Complexity	It is simpler, assuming uniform growth.	More intricate due to irregular cash flow timings.
Accuracy	Less accurate for investments with varying cash flow patterns.	It is more accurate for investments with irregular cash flows.

Practical Use Cases:

XIRR Vs. CAGR: Using CAGR to compare long-term lump sum investments. For SIPs, withdrawals, or real-life scenarios, XIRR is more accurate.

XIRR Vs CAGR: Pros and Cons

Metric	XIRR	CAGR
Pros	Handles irregular cash flows.	Simple to calculate for lump sums.
Cons	It is more complex with multiple inputs.	Assumes steady growth, but is not suitable for dynamic investments.

Conclusion

Understanding XIRR vs CAGR helps you make smarter investment decisions. CAGR is excellent for lump sum investments, but for SIPs and irregular cash flows, XIRR provides a more accurate return.

You can make informed financial decisions by knowing when to use XIRR vs CAGR. Whether you are analyzing mutual funds, stocks, or any other investment, knowing XIRR and CAGR meaning and formula can help you make better choices. The ideal way to go about this is to use both metrics as complementary tools rather than relying on a single one.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

What is a good CAGR for investments?
A good CAGR varies based on asset class. For equities, a CAGR of 12-15% is considered strong. For fixed deposits, a CAGR of 6-8% is reasonable. Higher-risk assets can have CAGRs above 20%.
Why is XIRR better for SIPs?
XIRR accounts for multiple investments made at different times. This makes it more precise for SIPs, where money is invested periodically rather than as a lump sum. It provides a more realistic return rate.
XIRR vs CAGR: Which one should I use?
If you have a lump sum investment, use CAGR. For SIPs or investments with multiple transactions, XIRR gives a more accurate return estimate. XIRR vs CAGR comparisons show that financial analysts recommend using both for a complete return analysis.

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Archana Chettiar

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.