Why the two numbers can look different
Two investments can finish with the same value but have very different cash-flow patterns. A single lump-sum investment is straightforward: you know when the money went in and what it is worth now. A series of SIPs, additional purchases, withdrawals or partial redemptions is different because every cash flow has its own date.
When CAGR makes sense
CAGR is a simple annualised growth rate for an investment with a clear beginning value, ending value and holding period. It is easy to understand and useful for comparing a straightforward lump-sum holding with similar investments.
When XIRR is more useful
XIRR is designed for dated cash flows. It treats each investment and withdrawal according to when it actually happened, making it a better fit for SIPs, staggered purchases and portfolios with withdrawals.
A practical example
Imagine you invest ₹10,000 every month for several years and then redeem part of the portfolio. There is no single investment date, so a simple CAGR can hide the timing of those contributions. XIRR uses the dated cash flows instead, giving you an annualised return that reflects the timing of the money.
What should you use?
- Single lump sum: CAGR is usually easy to understand.
- Multiple dated investments: XIRR is usually more informative.
- Withdrawals or partial redemptions: XIRR is generally the better fit.
Put it into practice with FolioTrack
Once you know what you want to measure, the next step is keeping the information organised so you can review it again later.