How Your SIP Return Is Actually Calculated (XIRR, Not CAGR)
A fund's '5-year return' and what your SIP actually earned are two different numbers, measured two different ways. Here's why your statement shows XIRR, and what it really means.
Open any fund page and you’ll see a headline like “5-year return: 14%”. Open your own statement for the same fund, held for the same five years, and the number next to your SIP is different. Neither is wrong. They measure two different things, with two different formulas — and once you see why, you’ll stop comparing them as if they were the same.
The fund’s number assumes one lump sum
A fund’s advertised “X-year return” is almost always its CAGR — compound annual growth rate. The formula is simple:
CAGR = (End ÷ Start)^(1 ÷ years) − 1
It answers one specific question: if you had put in a single lump sum on day one and left it untouched for the whole period, what steady annual rate would have grown it to today’s value? That’s a clean, honest measure — of the fund. It assumes one investment, one start date, one holding period.
A SIP breaks every one of those assumptions. You don’t invest once; you invest a little every month. January’s instalment is held for five years, but the one you paid last month has been invested for a few weeks. There is no single “holding period” to plug into the CAGR formula, because every instalment has its own. CAGR simply can’t describe a stream of dated investments — it was never built to.
XIRR is the money-weighted answer
So your statement uses XIRR — the extended internal rate of return. Think of your SIP as a list of dated cash-flows: money leaving your account each month, and the final value coming back at the end. XIRR finds the single annual rate that makes the present value of all those cash-flows net to zero. It weights each rupee by how long it was actually invested. That’s why it’s the honest answer to “what rate did my actual money earn?” — and why every app and statement shows it for SIPs.
The two numbers diverge because a SIP averages your entry price across the whole period — rupee-cost averaging. Where the market did its rising matters. If gains came mostly late in the period, your early instalments bought units cheaply and then rode the climb, so your SIP XIRR can beat the lump-sum CAGR. If gains came mostly early, your later instalments bought in after the run-up, and the SIP XIRR can trail it.
Neither figure is “better”. They answer different questions. The fund’s CAGR is about the fund’s journey from one date to another; your XIRR is about the timing of your own cash-flows. You can watch this happen live — the SIP Calculator computes XIRR on a monthly instalment stream, not a lump sum, so you can see the two diverge as you change the numbers.
What this means for you
The practical trap is comparing the wrong two numbers. Don’t take a fund’s advertised 5-year return (a lump-sum CAGR) and your own SIP’s XIRR, see a gap, and conclude the fund “underperformed for you”. You’re comparing a thermometer to a ruler.
If you want a fair fund-versus-fund read, compare like with like — two funds’ headline returns over the same window in Compare Funds, where both numbers are built the same way. And if you want to know what your money actually earned, read the XIRR on your statement. One number describes the fund; the other describes your discipline of investing through it.