XIRR vs CAGR: How to Measure Your Smallcase Performance?

What is XIRR?

XIRR stands for Extended Internal Rate of Return. It calculates the annualised return of an investment that has multiple cash flows at irregular intervals.

For example, when you invest additional amounts, receive dividends, or withdraw partially at different dates, XIRR takes all those into account.

• It effectively solves for a rate that sets the net present value of all cash flows, whether positive or negative, to zero.
• It uses actual dates and amounts of all investments and withdrawals.
• It reflects the time value of money more precisely.
• It requires tools or software (Excel, Google Sheets, or an investment platform) when cash flows are high.

What is CAGR?

CAGR means Compound Annual Growth Rate. It expresses the average annual growth rate of a single amount invested at the beginning and realized at the end of a period. It assumes growth is smooth and reinvested annually.

• You only need the starting value, the ending value, and the duration (in years).
• It does not consider any intermediate cash flows, contributions, or withdrawals.
• It gives you a simplified measure of growth averaged over the holding period.

Difference between XIRR and CAGR

The following table demonstrates the comparison between XIRR and CAGR, helping you to understand when one works better than the other.

Examples of XIRR and CAGR

Here are some examples or cases to see how the metrics work:

Example 1: Lump sum investment

You invest ₹1,00,000 today. After 3 years, it becomes ₹1,50,000.
CAGR = ((1,50,000 / 1,00,000)^(1/3)) − 1 ≈ 14.47% per annum.
Since only starting and ending values matter, this is simple.

Example 2: SIP or multiple cash flows

Let's consider, you invest ₹10,000 at the start of the first Year. You add ₹10,000 at the start of Year 2. You add ₹10,000 at the beginning of Year 3. At the end of Year 3, the total value is ₹35,000.
The calculation of CAGR will treat it as one investment from Year 1 to Year 3 growth (ignoring extra contributions), which misleads.

XIRR will treat each contribution with its date and produce a more accurate annualised return.

These examples show that with multiple contributions, XIRR tends to reflect the real earnings better.

Limitations of XIRR and CAGR

Both XIRR and CAGR are extensively used, but neither is perfect. Each has its own blind spots, and understanding these will help you avoid reading your portfolio performance the wrong way.

Limitations of XIRR

Here are the limitations of XIRR:

• High sensitivity to inputs: Because XIRR relies on exact cash flow amounts and dates, even a small error in recording can distort results significantly. When your transaction date is wrong even by a few days, it can lead to very different outcomes.
• Reinvestment assumption: XIRR assumes that every interim cash flow, whether it is dividends, withdrawals, or new investments, is reinvested at the same rate of return. In practice, that rarely happens, which means the figure can sometimes appear more optimistic than reality.
• Complex to compute manually: Unlike CAGR, which can be calculated with a simple formula, XIRR requires tools like Excel or financial platforms. For new investors, this complexity can be intimidating or lead to mistakes if not set up properly.
• Short-term distortions: If the investment period is very short with frequent contributions or withdrawals, XIRR may swing dramatically, making it less meaningful.

Limitations of CAGR

Here are the limitations of CAGR:

• Ignores cash flow timing: CAGR works only on the start and end values of an investment. If you added money in between, it does not account for how that cash really performed, which can misrepresent returns.
• Masks volatility: CAGR smooths the return curve as if growth happened evenly every year. In reality, investments often go through sharp ups and downs. By hiding this, CAGR may look safer than it really was.
• Limited use in active investing: For investors who make regular SIPs, partial redemptions, or reinvestments, CAGR is not a good indicator of performance since it fails to reflect those activities.
• Can mislead in comparisons: Comparing two portfolios with CAGR may seem fair, but if one had multiple inflows and the other did not, the metric does not give the full picture.

Knowing not only the limitations of XIRR and CAGR but also having detailed expert insights and industry knowledge helps you achieve potentially better returns.
The best way to leverage this is to get the best smallcase company in India at your corner, assisting you in portfolio management.

Pros and cons of XIRR and CAGR

The following are the pros and cons of XIRR and CAGR:

Pros of XIRR

• Captures real-world cashflows: XIRR accounts for irregular investments, withdrawals, SIPs, and redemptions, making it more reflective of how investors actually deploy money.
• Time-sensitive: It adjusts returns based on the timing of each cash flow, so early vs. late investments are weighted correctly.
• Better for performance tracking: For smallcase investments, where SIPs and top-ups are common, XIRR gives a realistic picture of actual returns.

Cons of XIRR

• Complex to calculate manually: It requires Excel or portfolio tools to compute; not as straightforward as CAGR.
• Sensitive to cashflow errors: Any incorrect entry (dates or amounts) can distort the result significantly.
• Short-term distortions: For short holding periods, XIRR may give exaggerated or misleading return percentages.

Pros of CAGR

• Simple and easy: It provides a clean, single annualized growth rate that's easy to understand.
• Good for long-term comparisons: It works well when comparing different smallcase portfolios or asset classes over multi-year horizons.
• Widely recognised metric: This metric is considered standard across financial analysis, making it easier and credible to use it for benchmarking performance.

Cons of CAGR

• Ignores cashflow timing: Assumes a lump-sum investment held throughout, which doesn't reflect SIPs or staggered entries.
• Can oversimplify: It can smooth returns into a straight line, masking volatility and timing effects.
• Not useful for uneven investments: It is less relevant if you invest varying amounts at different points in time.

How to check XIRR and CAGR on smallcase portfolios?

Smallcase platforms often provide both metrics in your dashboard or performance report. To check:

• Log in to your smallcase portfolio view.
• Go to the performance section. Most show "Annualised returns", which often is CAGR for your entire holding if no/out minimal cash flows.
• They may show "XIRR" or "IRR" when the smallcase accepts additional investments or withdrawals over time.
• If not shown, you can download historical transactions, compute cash flow dates and amounts, and use Excel's XIRR(values; dates) function.
• Also, you have to make sure to select the correct dates, from the first investment to the date you want to evaluate. Use realistic transaction values, including brokerage fees if possible.

Smallcase portfolios such as PINC Classic Compounder Fundamental offer you stocks with growth potential of 15 to 20% over a 3 to 5-year horizon.

When to use XIRR and CAGR

Which metric works better depends on your investment pattern and what insight you want:

You should use CAGR when:

• You invested a lump sum and held it for a fixed period.
• You want a quick comparison between funds or portfolios over equal timeframes.
• You don't have many or any intermediate contributions/withdrawals.

You should use XIRR when:

• You make multiple contributions over time, e.g., SIPs or top-ups.
• You withdraw periodically or partially.
• You want to reflect the actual return earned, considering timing.
• You care about seeing the real effect of cash flows (how early or late you add money).

Conclusion

Measuring performance matters a lot! Using the right metric helps you understand how well your smallcase portfolios actually perform.

CAGR gives a clean, simple growth rate when you started once and held through. XIRR gives a more realistic rate when you invest multiple times or withdraw during the term.

We at PINC Wealth, a leading wealth advisory brand that focuses on performance transparency, with our smallcase portfolios, you can see both CAGR and XIRR, where it is relevant.

Through expert-curated and research-backed portfolios, you can achieve your financial goals. Start your investment journey today!