SIP, CAGR and XIRR: The 3 Numbers Every Investor Should Understand
Financial apps throw performance metrics at investors daily. Misunderstanding how these numbers are calculated leads to poor investment choices.
1. SIP (Systematic Investment Plan)
A SIP is not an asset class, a fund, or a product—it is an execution method. It simply instructs your bank to purchase units of a specific mutual fund on a fixed day each month, averaging your purchase cost over market cycles (rupee-cost averaging).
2. CAGR (Compound Annual Growth Rate)
CAGR measures the annual growth rate of an investment over a multi-year period, assuming the money grew at a steady, smoothed rate.
When to use it: Only for lump-sum investments with a single start point and a single end point.
The limitation: CAGR fails completely if you invest money at different points in time (such as monthly SIPs).
3. XIRR (Extended Internal Rate of Return)
XIRR is the actual annualized return of your portfolio when multiple cash inflows and outflows happen at irregular or recurring dates.
Every single SIP installment has its own holding period. An installment invested in January 2023 has been compounding longer than an installment invested in June 2024.
XIRR computes the unique internal rate of return across every individual cash flow.
Summary for the Common Man
When checking your mutual fund app:
Ignore simple absolute returns if you’ve been investing for more than a year.
Focus on XIRR to see the actual performance of your ongoing SIPs.
Nikunjj Jhawar is a Chartered Accountant (CA) and Chartered Financial Analyst (CFA) with nearly two decades of experience in the financial services industry. Having worked with global institutions such as HSBC and Credit Suisse in investment-related roles, he brings deep expertise in finance and markets. He is the Founder of mangopeoplenews.com, where he focuses on making complex topics in finance, markets and business accessible and relevant to everyday readers.
