Your mutual fund statement shows three different return numbers. One is misleading, one is useful for lump sums, and one is the only number that matters for SIP investors. Here is how to read all three.
Your mutual fund app or statement shows three different return percentages. One says 85%. Another says 13%. A third says 14.2%. Which one is real? All of them — they just measure different things. Using the wrong one to evaluate your investment is how people make expensive decisions. Here is what each number actually means and which one you should look at.
Absolute Return: the simple but misleading number
Absolute return is just (current value ÷ invested amount − 1) × 100. It answers: 'How much have I made in total?'
If you invested Rs 1,00,000 five years ago and it is now worth Rs 1,85,000, your absolute return is 85%. It sounds impressive. But it completely ignores time. An 85% return over 25 years is terrible. An 85% return over 6 months is extraordinary. Same number, entirely different meaning.
When to use it: For investments held for less than one year, where annualising would be misleading. For comparing your current balance against your original investment amount — just to know the total gain.
When to ignore it: Whenever comparing investments of different durations. A 5-year-old investment with 85% absolute return vs a 1-year-old investment with 20% absolute return tells you nothing useful.
CAGR: the annualised single-investment number
CAGR (Compound Annual Growth Rate) answers: 'If my investment grew at a steady rate every year, what would that rate be?' It smooths out all the ups and downs into a single annual percentage.
Formula: CAGR = (End Value / Start Value)^(1/n) − 1, where n is the number of years.
If Rs 1,00,000 grew to Rs 1,85,000 in 5 years, CAGR = (1,85,000 / 1,00,000)^(1/5) − 1 = 13.1%.
CAGR is perfect for a lumpsum investment — you put money in once, let it grow, and want to know the annualised rate. But it has a blind spot: CAGR ignores the timing of cash flows. For a SIP — where money goes in every month — CAGR is mathematically wrong.
When to use it: Evaluating a one-time lumpsum investment. Comparing fund performance over the same time period.
When to ignore it: For SIPs. Every SIP instalment has a different holding period, and CAGR cannot account for this.
XIRR: the only number that matters for SIP investors
XIRR (Extended Internal Rate of Return) accounts for the fact that every SIP instalment was invested on a different date and has been compounding for a different duration.
A Rs 10,000 monthly SIP for 5 years has 60 different cash flows — each one invested at a different NAV. The first instalment has been compounding for 60 months. The last instalment for just 1 month. CAGR treats them all as if they started at the same time, which inflates or deflates the return depending on market direction.
XIRR solves this by finding the rate that makes the present value of all outflows (your SIP instalments) equal to the present value of the inflow (your final corpus), weighted by time.
When to use it: Always, for any investment with multiple cash flows at different times. SIPs, SWPs, staggered investments, dividend reinvestments.
When to ignore it: For a single lumpsum investment — CAGR is simpler and mathematically identical for one cash flow.
Real example: why the number you use matters
Consider a Rs 10,000/month SIP in a Nifty 50 index fund for 3 years (36 instalments = Rs 3,60,000 invested). The corpus is Rs 4,80,000.
- Absolute Return: (4,80,000 / 3,60,000 − 1) × 100 = 33.3%. Looks decent. - CAGR (treating it as a lumpsum at the start): (4,80,000 / 3,60,000)^(1/3) − 1 = 10.1%. Understates the true return because the last instalment had no time to grow. - XIRR: Approximately 14.5%. This is the correct, time-weighted annual return.
The difference between CAGR (10.1%) and XIRR (14.5%) is 4.4 percentage points — because CAGR incorrectly assumes all Rs 3,60,000 was invested on day 1.
Which number should you look at?
| Investment type | Use this | |---|---| | Monthly SIP | XIRR | | Single lumpsum held for 1+ years | CAGR | | Held for less than 1 year | Absolute Return | | Multiple top-ups or staggered investments | XIRR | | Comparing two funds over the same period | CAGR or XIRR, but use the same one for both |
Most mutual fund statements and apps now show XIRR for SIP investments. If yours only shows CAGR, you are seeing a mathematically incorrect annualised return for your SIP — it is likely understating your actual return.
Frequently Asked Questions
### What is a good XIRR for a SIP? For diversified equity funds over 7+ years, an XIRR of 10-14% is realistic. Above 14% is excellent. Below 8% over a 7-year period is below-average for Indian equity funds. For debt funds, 6-8% is realistic.
### How is XIRR calculated? XIRR uses an iterative mathematical method (Newton-Raphson) to find the discount rate that makes the net present value of all cash flows equal to zero. You do not need to calculate it manually — Excel, Google Sheets, and most mutual fund apps have a built-in XIRR function.
### Why does my app show a different return than my friend's app for the same fund? Different apps may use different methods. One may show CAGR, another XIRR, a third may show time-weighted return (TWR). For the same SIP in the same fund, compare XIRR — not CAGR or absolute return.
### Does dividend reinvestment affect XIRR? Yes, if you reinvest dividends, they are treated as additional outflows (negative numbers) in the XIRR calculation, and the final corpus includes the reinvested units. For the Growth option (where dividends are not paid out), XIRR is calculated on the NAV growth only.
### Is XIRR the same as annualised return? Not exactly. XIRR is one type of annualised return — one that accounts for irregular cash flows. An 'annualised return' without qualification could be CAGR, XIRR, or simple annualised return. Always check which methodology is being used.
Disclaimer
This article is for educational purposes only. Return calculations are mathematical and should be verified. Past returns do not guarantee future results.