Absolute return, CAGR and XIRR: which number is telling the truth?
The same investment can honestly be described as returning 533% or 12.67%. Both are correct. Only one is useful for comparing anything.
Loan Calculator Pro
· 3 min read
A fund factsheet says 533%. An app says 12.67%. Your statement says something else again. All three can be describing one investment, correctly.
Three measures, one SIP
₹10,000 a month at an assumed 12%, held for different lengths of time:
| Period | You invest | Value | Absolute return | XIRR |
|---|---|---|---|---|
| 5 years | ₹6,00,000 | ₹8,24,864 | 37% | 12.67% |
| 15 years | ₹18,00,000 | ₹50,45,760 | 180% | 12.67% |
| 25 years | ₹30,00,000 | ₹1,89,76,351 | 533% | 12.67% |
Look at the last two columns. The absolute return climbs from 37% to 533%. The XIRR does not move at all.
That is the whole lesson: absolute return measures how much, XIRR measures how fast. The investment did not get better over 25 years — it just had longer to work.
Absolute return
(Final value − amount invested) ÷ amount invested
Simple, honest about total gain, and completely blind to time. A 100% absolute return earned over three years and one earned over thirty look identical, though the first is excellent and the second is poor.
Use it to answer "how much did I make". Never use it to compare two investments held for different periods — which is precisely how it gets used in marketing.
CAGR
The compound annual growth rate: the constant yearly rate that would take your starting value to your ending value.
CAGR = (end ÷ start)1/years − 1
CAGR is the right measure for a single sum invested once and held throughout — a lumpsum, an FD, a property. It smooths the journey into one number, which is useful and slightly dishonest at the same time: no investment actually grows at a constant rate.
The trap is applying CAGR to a SIP. If you divide a SIP's final value by the total invested and annualise it, you get nonsense — because money you put in last month has not been compounding for fifteen years. It flatters the result badly.
XIRR
XIRR is CAGR's grown-up sibling: the annualised rate that accounts for each contribution having been invested for a different length of time, and for withdrawals along the way.
Mathematically it is the rate at which all your cash flows discount back to zero. There is no closed formula; it has to be solved iteratively, which is why spreadsheets have an XIRR function rather than a simple expression.
For anything with staggered money — a SIP, an RD, a PPF, a portfolio you have added to and drawn from — XIRR is the only annualised figure that means anything.
Our calculators pick between them deliberately: lumpsum and FD report a CAGR because the money sits there throughout; SIP, RD and PPF report an XIRR because it does not.
Why the nominal rate and the XIRR differ slightly
You may notice a SIP at an assumed 12% reports an XIRR of 12.67%. That is not an error.
12% is a nominal annual rate compounded monthly. Compounding twelve times a year turns it into an effective annual rate of about 12.68%. The XIRR is measuring the effective rate, which is the one you actually experience.
How to use this in practice
Reading a fund's marketing: if it leads with a large absolute number over a long period, it is telling you the period was long. Find the annualised figure.
Comparing two options: only ever compare annualised returns over the same period. Absolute returns across different horizons are meaningless side by side.
Judging your own portfolio: XIRR, from your actual contribution dates. Anything else overstates you.
One thing all three ignore: inflation, tax and costs. A 12.67% XIRR before a 30% tax and 6% inflation is a very different number afterwards — which is the subject of another guide.
General information, not financial advice.
A reminder: this article is general information about how loans work in India, not personalised financial advice. Your circumstances, tax position and the terms in your own loan agreement all change the right answer. For a decision of any size, talk to a qualified adviser.