XIRR vs CAGR: What's the Difference?

The one case where XIRR and CAGR always agree

CAGR (Compound Annual Growth Rate) is defined as ((ending value ÷ starting value) raised to the power of (1 ÷ number of years)) minus 1. It only ever looks at two numbers and a time span: what you started with, what you ended with, and how long it took. If your entire investment history is a single lump sum invested on day one and a single value observed later, with nothing added or removed in between, XIRR reduces to exactly the same formula, because there are only two cash flows to discount. Run the same two numbers and dates through the XIRR calculator's irregular cash flows mode and CAGR's own formula, and the two results will match to several decimal places.

Worked example: a lump sum, no complications

Invest ₹1,00,000 on 1 January 2022 and find it worth ₹1,33,100 exactly two years later, on 1 January 2024. CAGR gives ((1,33,100 ÷ 1,00,000) to the power of (1 ÷ 2)) minus 1, which is 15.37 percent. Enter the same two cash flows, an investment of ₹1,00,000 on 1 January 2022 and a withdrawal or value received of ₹1,33,100 on 1 January 2024, and XIRR also returns 15.37 percent. No disagreement, because there is nothing for the timing sensitivity of XIRR to actually respond to.

Where they diverge: a mid-way top-up

Now add a single complication to the same example: instead of investing the full ₹1,00,000 upfront, suppose ₹60,000 goes in on 1 January 2022 and a further ₹40,000 goes in exactly one year later, on 1 January 2023, and the combined investment is again worth ₹1,33,100 on 1 January 2024.

CAGR has no way to represent this scenario correctly: it only accepts one starting figure and one ending figure. Naively treating the sum of contributions (₹1,00,000) as the starting value and applying the same two-year CAGR formula would overstate how long the second ₹40,000 had actually been invested, understating its true contribution to the annualised return. XIRR handles it directly, because each cash flow keeps its own date: ₹60,000 invested on 1 January 2022, ₹40,000 invested on 1 January 2023, and ₹1,33,100 received on 1 January 2024. Solving this in the XIRR calculator's irregular cash flows mode gives a noticeably different annualised rate from the naive CAGR shortcut, precisely because the second contribution had only one year to grow instead of two.

Why this matters most for SIPs

A Systematic Investment Plan is the extreme version of the mid-way top-up scenario: instead of one extra contribution, there can be dozens, each on its own date, each with a different amount of time left to grow before the measurement date. CAGR simply cannot represent a SIP's return correctly, because it was designed for a single starting amount and a single ending amount. This is why every SIP return calculation, including the regular investments mode in the main XIRR calculator, is built on XIRR rather than CAGR: it is solving the same underlying equation as an irregular cash flow list, just with the convenience of a fixed schedule instead of manually dated rows. See the Excel and Google Sheets walkthrough if you want to verify a SIP's XIRR independently in a spreadsheet.

A quick way to tell which one you actually need

Ask a single question: did money move in or out of this investment on more than two dates? If the answer is no, meaning exactly one investment and one final value, CAGR and XIRR will agree, and either is fine to use. If the answer is yes, even a single extra top-up or partial withdrawal is enough, XIRR is the metric that reflects reality, and a CAGR calculated on the summed contributions will misstate the return. Every number in the worked examples above was calculated using the same solver that powers the XIRR calculator; nothing you enter there is sent anywhere, see the privacy policy for details.