How SIP returns are actually measured
The same SIP can produce three very different return figures depending on how you measure it. Each one is technically valid, but only one answers the question most investors actually have: “what rate did my money earn?”
The SIP we’ll use as an example
Throughout this page we’ll keep referring to the same SIP, so the numbers stay easy to compare:
- ₹10,000 invested at the end of every month, for 5 years (60 months).
- The underlying fund grew at a steady 1% per month (12% annual, nominal).
- At the end of month 60, the value of all units is ₹8,16,697.
- Total amount you put in: ₹6,00,000.
- Total gain: ₹2,16,697.
Now let’s see what return that “is”, depending on who’s asking.
1. Absolute return
Absolute return is the simplest measure. It just compares the final value to the total invested, with no adjustment for time.
Absolute return = (Final value − Total invested) / Total invested
For our example:
= (8,16,697 − 6,00,000) / 6,00,000
= 2,16,697 / 6,00,000
= 36.12%That 36.12% sounds large, but it’s spread over 5 years, and it ignores the fact that the last instalment of ₹10,000 was invested for just one month while the first was invested for the full 60 months. Absolute return is fine for advertisements; it’s misleading for decision-making.
2. CAGR (the wrong way to apply it)
Compound Annual Growth Rate is the standard way to annualise a lumpsum investment. The formula is:
CAGR = (Final / Initial)1/years − 1If we naively plug in our SIP numbers, treating the total ₹6 lakh as if it were invested on day one:
= (8,16,697 / 6,00,000)1/5 − 1
= 1.36120.2 − 1
= 6.35%That 6.35% is roughly half of the actual rate the money earned. The formula is correct; the application is wrong. CAGR assumes the entire ₹6 lakh sat in the market for 5 years, but in a SIP, only the very first ₹10,000 did. The later instalments had progressively shorter holding periods. Stretching the holding period out to 5 years for the whole amount makes the implied annual return look much smaller than it really was.
CAGR works for a lumpsum. For an SIP, it doesn’t.
3. XIRR (the right way for SIPs)
XIRR — Extended Internal Rate of Return — solves for the single annualised rate at which all of your actual cashflows (each SIP instalment going out, the final value coming back) net to zero in present-value terms. Conceptually:
Find r such that:
Σ (cashflowi / (1 + r)(ti in years)) = 0
Each SIP instalment is a negative cashflow at its own date,
the final value is a positive cashflow at the end date.There’s no closed-form answer; XIRR is solved numerically (Newton-Raphson or bisection). Spreadsheets and broker apps do this for you. For our example, XIRR comes out to approximately 12.68% per year, which is the effective annual rate corresponding to the 1% monthly growth the fund actually had.
XIRR is the honest number. It correctly weights each rupee by how long it was actually invested.
All three side by side
| Metric | Value | What it tells you |
|---|---|---|
| Absolute return | 36.12% | Total gain as a fraction of total invested. Ignores time. Useful for “by how much did my money grow in total”. |
| Naive lumpsum CAGR | 6.35% | What you would have earned if all ₹6 lakh had been invested at the start. Wrong for SIPs — understates the actual return. |
| XIRR | ≈ 12.68% | True annualised return on each rupee, weighted by holding period. The right number for SIP performance. |
Why apps show different numbers
Most broker and AMC apps (Zerodha Coin, Groww, Kuvera, ET Money) report XIRR for SIP holdings. Some statements quote absolute return alongside it. A few fund factsheets use point-to-point or trailing returns, which are different again. If two numbers don’t agree, the first thing to check is which method is being used.
When someone says “my SIP gave 18% returns”, the meaningful follow-up is: “XIRR, or absolute over 5 years?” The difference is often the difference between an excellent fund and an ordinary one.
In short
- Use XIRR to evaluate or compare SIPs.
- Treat absolute return as a marketing figure; it’s easy to compute but easy to misread.
- Don’t apply CAGR to an SIP unless you genuinely mean “what lumpsum return would this be equivalent to” (rarely a useful question).
FAQs
Why does my Groww or Coin app show a different SIP return than my own calculation? ▾
Most apps report XIRR, which annualises each instalment's return based on how long it was actually invested. If you computed a simple "total gain / total invested" or treated the SIP like a single lumpsum, your number will not match. XIRR is the right comparison.
Is XIRR always higher than the naive CAGR for an SIP? ▾
Almost always, yes. The naive CAGR treats your total invested amount as if it had been a single lumpsum at the very start, which inflates the holding period for later instalments. That makes the implied annualised rate look smaller. XIRR weights each instalment by the time it was actually in the market, which is the honest figure.
Why is the XIRR sometimes higher than the "expected annual return" I entered in a calculator? ▾
Most online SIP calculators (this one included) use the convention that monthly rate = annual rate ÷ 12. That is nominal annual compounded monthly. The effective annual rate is slightly higher: 12% nominal works out to roughly 12.68% effective, and that is what an XIRR calculation would report. It is the same return, expressed two ways.
Should I use absolute return to compare two SIPs? ▾
No. Absolute return ignores time, so a 5-year SIP and a 15-year SIP showing the same absolute return are not comparable. Always compare SIPs on XIRR.
How is XIRR actually calculated? ▾
XIRR solves for the single annualised rate r that makes the present value of all your cashflows (the SIP instalments and the final value received) equal to zero. There is no closed-form solution; spreadsheets and apps solve it numerically (Newton-Raphson or bisection). The output is the effective annual rate.
Does XIRR account for taxes? ▾
No. XIRR is a pre-tax return. To see the post-tax picture, you have to subtract LTCG tax from the final value before computing XIRR, or simply look at the post-tax corpus figure separately.