Absolute Return vs CAGR vs XIRR: The Simple Guide Every Investor Needs

Introduction

Many investors face the same doubt when they start investing in mutual funds. When you buy a fund, the investment website/app often displays the fund's CAGR as 21% or some other significant number. However, after you start investing, your own returns appear to be much lower.

This immediately creates confusion and makes you wonder: “Did they lie to me? Did they show a big number just to make me buy the fund?”

The answer is no—they didn’t lie. The confusion comes from mixing up two different types of returns: Absolute Return and CAGR. These two numbers are calculated very differently, and that’s why what you see on the app and what you see in your own portfolio rarely match.

This confusion becomes even greater when you invest through systematic investment plans (SIPs), as SIP investments occur every month. Since each monthly instalment has a different investment date, you cannot use the normal CAGR for SIPs. Instead, SIP returns are calculated using a method called XIRR, which operates differently and often yields a result that is either lower or higher than the advertised CAGR.

In this blog, we will break down what Absolute Return actually means, what CAGR means, why your return looks different from the fund’s advertised CAGR, and how return calculation works for both lump sum and SIP investments. By the end, you will clearly understand the difference and never feel confused again.

Absolute Return for Lump-sum and SIP Investment

Let's start with the simplest one.

You invest ₹10,000 in a mutual fund. After 2 Years, the value becomes ₹11,500.

Your profit = ₹11,500 – ₹10,000 = ₹1,500

So, your absolute return is: (1500/10,000) * 100 = 15.00%

Absolute Return for SIP

Suppose you invest ₹1,000 every month for 24 months.

Your total investment =₹1,000 × 24 = ₹24,000

After 24 months, the value of your SIP investment becomes ₹28,400.

Total gain = ₹28,400 – ₹24,000 = ₹4,400

So your absolute return is: (4400/24000) *100 = 18.33%

That’s all. Absolute return simply compares the total amount invested vs the current value, even in SIPs, without considering the time factor

CAGR Return for a Lump-Sum Investment

Let's take the same example to calculate the CAGR for a lump sum investment.

CAGR tells you how fast your money grew each year on average, as if it grew at the same steady speed every year.

You might ask: if the absolute return is 15% for the same example and if CAGR is average, then shouldn’t the per-year returns just be 15% ÷ 2 = 7.5%?

You're on the right track, but you've missed a very small point.

You’re thinking in terms of a simple average, like splitting a pizza into equal slices.

However, investments grow through compounding, not simple addition.

If the return was really 7.5% every year, then:

• After 1st year: ₹10,000 × 1.075 = ₹10,750

• After 2nd year: ₹10,750 × 1.075 ≈ ₹11,556.25

So, with a 7.5% annual interest rate, your final value would be ₹11,556.25; however, in our example, it is ₹11,500.

Therefore, the CAGR Return is slightly less than 7.5% per year.

Now, if the return is 7.238% (calculated using the CAGR Return formula)

• After 1st year: ₹10,000 × 1.07238 = ₹10,723.8

• After 2nd year: ₹10,723.8 × 1.07238 = ₹11,500

Now the final amount exactly matches the value of the investment after 2 years.

Where n = number of years

Plugging in the numbers: (15,000/10,000) ^ (1/2) - 1 = 0.07238

CAGR Return for a SIP Investment (Using XIRR)

For SIPs, the normal CAGR formula cannot be used.

Why?

Because in SIP, all the money is not invested on the same day.

• Your 1st SIP stayed invested for 24 months

• Your 2nd SIP stayed for 23 months

• Your 3rd SIP stayed for 22 months

• …

• Your last SIP stayed for just 1 month

Each instalment has a different time duration. So, we need a method that can calculate the return considering every single cashflow and its date.

That method is called XIRR.

XIRR provides a single yearly return rate that aligns perfectly with the inflows (SIP payments) and the final value.

If you look at how XIRR is actually calculated, it involves dozens of steps, repeated iterations, and complex formulas where each SIP date is discounted differently. Even for a small 24-month SIP example, the manual method becomes extremely long and confusing. That’s why it's very complex to calculate XIRR manually.

Instead, everyone uses tools.

The easiest method is:

Use Excel/Google Sheets and simply apply the =XIRR (values, dates)

Simply enter all SIP amounts as negative values, enter the final value as positive, and add the dates. Excel will then instantly calculate the correct SIP XIRR.

This is the most accurate and practical method for calculating SIP returns.

Before we conclude the blog, let us invite you for a 1:1 financial planning session.

Book Your Slot

Conclusion

Understanding returns becomes much easier once you know the difference between Absolute Return, CAGR, and XIRR. Most of the confusion happens because investors expect their own returns—especially in SIPs—to match the returns shown on mutual fund apps or fund fact sheets. But here’s the key point:

The performance numbers shown by mutual fund companies, advertisements, and apps are almost always CAGR for lump-sum investments. They are not the same as your standard income tax return.

Your own return will look different because:

• You didn’t invest the full amount at the start (like a lump sum).

• You invested monthly, so each instalment had a different time to grow.

• SIP returns are calculated using XIRR, not simple CAGR.

• Markets do not move in a straight line every year.

So, when the app says the fund has delivered 21% CAGR, it means:

“If someone had invested a single lump sum amount years ago and stayed invested, their investment grew at an average of 21% per year.”

However, your SIP money did not grow at the same rate for the same number of years. Some parts grew for 24 months, some for 15 months, some for 3 months — and that’s why your return will almost never match the published CAGR.

The good news is that once you understand which return measure applies where, you will never feel misled or confused again.

• Use Absolute Return for quick, simple profit checks.

• Use CAGR for lump-sum investments over multiple years.

• Use XIRR for SIP investments to get the true annual return.

With this clarity, you can now read mutual fund statements, compare funds, and evaluate your investment performance with confidence—just like a smart, informed investor.