What Is XIRR in Mutual Funds? XIRR vs CAGR vs Absolute Return

Open any mutual-fund statement or portfolio app and you’ll see a return figure labelled “XIRR”. It often looks nothing like the gain you can see with your own eyes — which confuses many investors. Here’s what the three common return measures mean, and which one to trust for your SIP.

Absolute return — the simple gain

Absolute return is just (current value − amount invested) ÷ amount invested. Put in ₹1 lakh, now worth ₹1.2 lakh → 20%. It ignores time completely: 20% in one year is excellent, 20% over eight years is poor. Use it only for holdings under a year.

CAGR — annualised return for a one-time investment

CAGR (Compound Annual Growth Rate) converts total growth into a per-year rate: (final ÷ initial)^(1/years) − 1. ₹1 lakh growing to ₹2 lakh in 5 years is a CAGR of about 14.9% — as if it grew 14.9% every single year. CAGR is the right measure for a single lumpsum, but it breaks down the moment money goes in or comes out midway.

XIRR — the right measure for SIPs

A SIP is not one investment — it’s dozens of investments made on different dates, each compounding for a different length of time. Your first installment may have run for 3 years; the latest for just a month. XIRR (Extended Internal Rate of Return) handles exactly this: it finds the single annual rate that explains all your cash flows and today’s value together.

A quick example

Say you ran a ₹10,000 monthly SIP for 3 years (₹3.6 lakh invested) and it’s now worth ₹4.35 lakh. The absolute return is about 21%, but each installment was invested for a different period — the XIRR works out to roughly 12% a year. That 12% is the number to compare against the fund’s benchmark and your alternatives.

What’s a “good” XIRR?

• Compare against the fund’s benchmark index over the same period — beating it is what matters.
• Indian equity funds have historically delivered ~11–14% XIRR over long (7+ year) periods.
• An XIRR below inflation (~6%) means your money is losing purchasing power.
• Ignore the XIRR of a SIP only a few months old — annualising a short period is statistical noise.

Want to compute an annualised return on your own numbers? Our CAGR calculator does it in seconds.