What is XIRR and why is it used for SIPs?

XIRR is the annualized return that accounts for the exact date of every deposit and withdrawal. Because a SIP makes 12+ deposits a year at different times, XIRR is the honest measure of its true annual return.

Why is CAGR wrong for a SIP?

CAGR assumes the entire invested amount was put in on day one. A SIP invests month by month, so money invested late in the tenure had far less time to grow. Using CAGR on a SIP inflates the true return.

What is the SIP future value formula?

For a fixed monthly installment M, monthly rate i and m months: FV = M × [((1 + i)^m − 1) / i] × (1 + i). It assumes contributions at the start of each month and a constant rate, which real markets do not follow.

How does a step-up change SIP returns?

A step-up raises the monthly amount each year, so later (larger) contributions earn for fewer years. That usually lowers the blended XIRR slightly even though the final corpus is much larger — total growth and per-year return move in opposite directions.

How SIP Returns Are Calculated

A SIP is a stream of deposits, not a single investment, so its return cannot be measured with one simple CAGR figure. The correct measure is XIRR — the annualized return that weights each deposit by exactly how long it was invested. This page explains the formula, why CAGR misleads for SIPs, and how step-ups change the picture. Try the numbers live in the SIP Calculator.

Why CAGR is the wrong tool for a SIP

CAGR assumes the total invested amount was all in the market from day one. A SIP invests in month 1, month 2, and month 120 separately — money invested in year 8 earns only the last two years of growth. If you plug a SIP's final value into a CAGR formula, you get a number that looks higher than the real per-year return, because it pretends every deposit aged like the first one. That is why fund houses quote XIRR for SIPs.

The SIP future value formula

With a constant monthly installment and a constant rate, the corpus after m months is:

FV = M × [ ((1 + i)^m − 1) / i ] × (1 + i)

M — monthly installment
i — monthly rate = annual rate / 12 (e.g. 12% p.a. → 0.01)
m — number of months

The trailing (1 + i) shifts each contribution to the start of its month. The formula assumes a constant rate forever — which no market delivers — so it is a projection tool, not a measurement tool. For measurement you need XIRR.

What XIRR actually does

XIRR finds the single annual rate that makes the present value of all your deposits equal to today's corpus value. Each deposit D made t years ago is discounted by (1 + XIRR)^t, and XIRR is the rate where everything balances:

Σ Dₖ / (1 + r)^(tₖ) = Current Value

A deposit made 2 years ago counts much more heavily than one made 2 months ago — which is exactly right, because the old money did most of the earning.

A worked example

Invest $10,000 per month for 5 years (60 deposits, $600,000 total). The projected corpus at a steady 12% p.a. is roughly $826,000.

Measure	How it is computed	Result
Total invested	60 × $10,000	$600,000
Wealth created	$826,000 − $600,000	$226,000
Absolute return	$226,000 / $600,000	37.7%
Simplistic CAGR	(826,000/600,000)^(1/5) − 1	6.6% (misleading)
XIRR	weights each deposit by its time in market	12.0% (honest)

The same money, two very different "returns" — which is why you should always ask which measure a report is using. The SIP Calculator shows XIRR directly so you never have to do this by hand.

How a step-up changes the math

If your installment grows 10% every year (a common salary-linked approach), your later deposits are bigger but earn for less time. The final corpus ends much larger, yet the blended XIRR usually dips slightly — large recent contributions are "young" money. Both numbers matter: XIRR tells you the per-year efficiency, the corpus tells you the actual outcome.

Comparing SIPs fairly

Always compare SIPs on XIRR over the same time period, never on corpus size alone — a bigger corpus can simply mean a bigger SIP. For one-time investments, XIRR and CAGR coincide, which is why the CAGR Calculator is the right tool there. Read the CAGR vs absolute return guide to see how both measures can mislead.