XIRR for SIP Investors
Why CAGR Fails for SIPs
CAGR assumes one investment at the start and one value at the end. But with SIP, you invest every month — each installment has a different holding period:
- January SIP has been invested for 12 months
- June SIP has been invested for 7 months
- December SIP has been invested for 1 month
What is XIRR?
XIRR (Extended Internal Rate of Return) calculates the annualized return considering multiple cash flows at different dates.
It's the rate that makes the present value of all your investments and the final value equal to zero.
Intuitive Explanation
Think of XIRR as: "If I put all my SIP money in a single FD that compounds annually, what interest rate would give me the same final amount?"
Example
| Date | Cash Flow |
|---|---|
| 1 Jan 2024 | -₹10,000 (SIP) |
| 1 Feb 2024 | -₹10,000 (SIP) |
| ... | ... |
| 1 Dec 2024 | -₹10,000 (SIP) |
| 31 Dec 2024 | +₹1,35,000 (current value) |
XIRR vs CAGR
| CAGR | XIRR | |
|---|---|---|
| Cash flows | One in, one out | Multiple in/out |
| Use case | Lumpsum | SIP, SWP, irregular |
| Calculation | Simple formula | Iterative (Newton-Raphson) |
| Your return | Not for SIP | Yes — your real return |
Your SIP XIRR can differ significantly from the fund's 1Y CAGR return because:
- Market timing of your SIPs matters
- Recent SIPs haven't had time to compound
- Early SIPs have compounded longer