SIP investor? Your fund returns may be misleading you

Summary: Understanding return metrics is crucial for SIP investors who often rely on dashboard figures that don't reflect their actual investment experience. This article breaks down the three most common return measures—absolute return, CAGR and XIRR—and explains why XIRR is the metric that truly reveals your real SIP gains.

Let's say you've been diligently investing Rs 5,000 every month for five years into a mutual fund. One day, when you check your mutual fund app, you might see something like ‘CAGR: 16 per cent’ and assume that's exactly what you earned.

But here's the truth: if you're investing via SIPs, those numbers can be misleading.

Because the return you are usually looking at – CAGR (Compounded Annual Growth Rate) – is calculated assuming that you invested a lump sum amount at the beginning of the five-year period and held it untouched till today.

But that's not what SIP investors do. It doesn't account for the fact that you've been adding money every month for years. In fact, if you've been investing Rs 5,000 every month for five years through an SIP, you didn't invest all your money at the beginning. Your last SIP went in just a month ago, not five years ago.

So, what you see as ‘returns’ might not reflect your actual experience. To understand why, let's break down the three common return measures: absolute return, CAGR (also known as annualised return) and XIRR.

#1 Absolute returns

This metric shows the simple percentage gain on your investment without considering the time taken to achieve it. If you invested Rs 1 lakh and it became Rs 1.2 lakh, your absolute return is 20 per cent. But this tells you nothing about how long the wealth creation took.

This one is easy to calculate.

If you invested Rs 1 lakh and it became Rs 1.2 lakh, your absolute return is 20 per cent.

Sounds great! But here's the catch: it doesn't tell you how long it took for your Rs 1 lakh investment to grow to Rs 1.2 lakh. Was that return over six months? Three years? Five?

Without the time factor, this number is a bit like saying "I ran 10 km" without saying how long it took. Did you jog that distance in two hours? A day? One month?

#2 CAGR

CAGR (Compounded Annual Growth Rate) measures how much an investment grows annually, making it useful for lump-sum investments held over multiple years. However, it assumes the entire capital was invested at the start, which doesn't reflect how SIP investors actually deploy their money month by month.

CAGR accounts for time. It shows how much your investment has grown each year.

So, if that Rs 1 lakh became Rs 1.2 lakh in one year, the investment grew at an annualised rate of 20 per cent. If the money grew over two years, the CAGR would be 9.54 per cent. Over three years, the investment would have annually grown at just 6.27 per cent.

In other words, CAGR is not only good for one-time investments but also takes the duration into account. However, CAGR is not an accurate measure for SIP investments, where you invest gradually over time.

#3 XIRR: Best for SIP returns

XIRR (Extended Internal Rate of Return) accounts for each individual SIP investment and when it was made, providing a true measure of returns for investors who add capital at regular intervals. For detailed methodology, see how XIRR is calculated.

Now, let's say you wanted to invest a total of Rs 1 lakh over two years using SIPs. To do that, you'd need to invest about Rs 4,167 per month (because Rs 4,167 × 24 months = Rs 1,00,008, or close enough to Rs 1 lakh).

At the end of this two-year period, your investment grows to Rs 1.2 lakh.

Here's where things get interesting: the first SIP had 24 months to grow, the second 23 months, and so on. The last SIP barely had a month. So, not all of your money got the same time in the market.

That's exactly why CAGR falls short. It assumes the entire Rs 1 lakh was invested at the start and grew steadily for two years, which isn't how SIPs work.

XIRR fixes this. It looks at each monthly investment, how long it stayed invested, and then calculates your actual annual return.

Therefore, in this case, if the Rs 4,167 monthly SIP over two years amounted to Rs 1.2 lakh, the XIRR would be 14.82 per cent, higher than the 9.54 per cent CAGR.

The XIRR-CAGR gap in reality: A 2025 market example

When markets experience corrections, SIP investors who stay disciplined benefit from rupee cost averaging—buying more units at lower prices during downturns. The 2025 market volatility provides a real-world example of how XIRR reveals the true value of continuing your SIP investments despite short-term market swings.

Suggested read: Why you should continue SIPs in market downturns

To understand how this gap plays out in real market conditions, let's examine a scenario from 2025. Consider an investor who started a monthly SIP of Rs 500 in January 2025 and continued through December 2025. This investor navigated a challenging year: the Nifty 50 fell approximately 12 per cent from its September 2024 highs in the January-March 2025 period before recovering strongly in March with a 6 per cent monthly rally. Market volatility remained subdued, with the NSE VIX closing at 10.9 in December 2025, indicating healthy conditions for systematic investors.​

Over 24 months with Rs 500 per month, this investor made a total investment of Rs 12,000. Suppose the portfolio value at the end of December 2025 stood at Rs 13,300 (assuming a reasonable recovery through the year's volatility).

If we calculate CAGR on this, assuming the entire Rs 12,000 was invested on day one, we would get approximately 4.7 per cent annualised return over two years. However, since this investor made regular monthly investments starting January 2025, with each instalment exposed to different market conditions, the actual XIRR would be approximately 6.2–6.8 per cent. The difference might seem small numerically, but it accurately reflects the investor's actual experience navigating the correction and recovery of 2025.

More importantly, this example illustrates a critical insight: investors who continued their SIPs despite the January-March 2025 market correction benefited from rupee-cost averaging. When markets fell, their monthly SIPs bought more units at lower prices.

According to the Association of Mutual Funds in India (AMFI), SIP investments across the industry remained strong, with yearly contributions increasing 45.24 per cent in fiscal year 2025 to Rs 2.89 lakh crore. SIP assets grew 24.59 per cent to Rs 13.35 lakh crore, and the number of contributing SIP accounts reached 8.11 crore—a 27.17 per cent year-on-year increase. This data demonstrates that disciplined investors continued purchasing even during uncertainty.​

The cost of pausing your SIP during market downturns

When panic strikes during market corrections, many SIP investors pause their investments, hoping to protect capital. However, this decision often erodes future gains by missing rupee-cost-averaging benefits.

Suggested read: Pausing SIP or exiting funds today? It can erase 9% returns

One of the most psychologically challenging moments for SIP investors comes during market corrections. In January 2025, when the Nifty 50 tumbled and mid-cap stocks fell even more sharply—with the Nifty Midcap 150 down 20 per cent and Nifty Smallcap 250 down 26 per cent—the SIP stoppage ratio reached 109 per cent. This means more investors cancelled their SIPs than started new ones. This panic-driven decision proved costly.​

Consider the opportunity cost for an investor who paused their Rs 500 monthly SIP during the three-month correction (January-March 2025) and resumed in April. This investor would have missed out on three months of contributions – Rs 1,500 in total – invested at lower valuations. When the market rebounded 6 per cent in March 2025 alone, those units purchased at lower prices would have yielded significantly higher gains.

More significantly, the investor who paused lost the compounding advantage during the market recovery. Research shows that investors who maintained discipline during the 2008 Financial Crisis and other market downturns went on to earn returns exceeding 15–18 per cent over the subsequent five years. Those who paused and re-entered later consistently underperformed by 2-4 percentage points on an annualised basis.​

The evidence is compelling: AMFI data reveal that SIP discontinuation, while high in January 2025, moderated as the year progressed. By September 2025, SIP inflows hit an all-time high of Rs 29,361 crore. By November 2025, SIP assets surged to Rs 16.53 lakh crore, accounting for 20.5 per cent of the industry's AUM with 9.43 crore active accounts. Investors who continued their SIPs through volatility are now seeing their discipline rewarded, particularly in the recovery phase.

Suggested read: SIP investing is seeing a quiet wealth-building revolution

When your XIRR falls short: The action plan

If your XIRR is underperforming expectations, you have three strategic options: continue with discipline (best for most investors with 5+ year horizons), increase contributions during downturns (for high-risk-tolerance investors), or switch to better-performing funds with tax awareness.

If you calculate your XIRR and find it significantly lower than the expected CAGR benchmark (typically 10–12 per cent for equity funds), you have three strategic options to consider.

Option 1: Continue with discipline (For most investors)

If your investment horizon is still five or more years and your fund selection is sound, continue your SIP unchanged. Temporary underperformance is normal, and markets historically reward patience. Historical data shows that SIPs held for seven or more years deliver returns exceeding 15 per cent annually in approximately 85–95 per cent of rolling periods. Even if your current XIRR is 6–8 per cent, continuing through volatility typically boosts this figure significantly as compounding takes effect.​

The power of rupee cost averaging cannot be overstated. When markets are down and your XIRR appears weak, you're actually buying more units at lower prices. These units multiply in value when markets eventually recover, which they historically always have. The key is remaining invested long enough for this mathematical advantage to manifest.

Option 2: Strategic addition (For high-risk-tolerance investors)

If you have additional capital available and your XIRR disappointment stems from poor market timing (entering during a bull phase), consider increasing your monthly SIP amount temporarily. This accelerates your rupee cost averaging benefit and has been shown to improve long-term XIRR by 1–3 percentage points for disciplined investors. However, this strategy requires a six-month emergency fund in liquid savings before execution.​

Option 3: Fund switch with tax efficiency (Selective use)

If your XIRR underperformance is due to poor fund selection rather than market timing, consider switching to a better-performing fund within the same category. However, be mindful of tax implications. In India, selling mutual fund units triggers capital gains tax (20 per cent short-term or 12.5 per cent long-term, depending on holding period). For most investors in moderate tax brackets, a switch is justified only if the new fund has demonstrably better fund management and historical returns are at least 2–3 percentage points higher. This decision should be made during tax-efficient windows (post long-term holding period).

Notably, 2025 data shows that investors who stayed invested saw a marked improvement in returns by year-end, validating the ‘stay the course’ approach for long-term portfolios. The Nifty 50 ended 2025 with approximately 9.4 per cent gain, and the financial sector gained nearly 20 per cent, with banks gaining 9 per cent—significantly outperforming the broader index on a full-year basis.​

A quick recap

• Use absolute returns if your investment lasted less than a year.
• Use CAGR for lump sum investments held for more than a year.
• But if you're doing SIPs, the metric that truly tells your story is XIRR

Your mutual fund dashboard might show CAGR by default, but don't let it mislead you. For the clearest picture of your real returns, especially when investing gradually, look at XIRR. And when you do, remember: the investor who stayed disciplined during 2025's market turbulence is now reaping the rewards of rupee cost averaging. That could be you, too.

Additional resources for SIP investors

To calculate your personal XIRR and refine your SIP strategy, explore these free tools and calculators from Value Research. You can also review fund performance through the fund selector tool to evaluate whether your current fund is delivering as expected.

For deeper insights into fund selection methodology, refer to the fund rating methodology guide to understand how funds are evaluated at Value Research.

For a comprehensive understanding of SIP fundamentals, explore what is SIP in mutual funds—a beginner's guide and SIP investing: what is 'long term' for SIP?

For deeper insights into long-term wealth creation, investors seeking more structured learning can access free investment e-books on passive investing, retirement planning and financial goal attainment. Lastly, tune into the investing podcast for regular expert discussions on mutual fund strategy and market insights.

This article was originally published on July 01, 2025, and last updated on January 07, 2026.