How Returns Are Calculated, and Why Four Numbers Disagree

The simplest one. What it grew by, expressed as a percentage of what you put in, with no reference to how long it took.

That omission is the whole problem. The same absolute figure means something very different over two years than over eleven, and quoting it without the period attached is technically true and practically useless.

Where it is legitimate is over a period under a year, since annualising a short period exaggerates rather than clarifies. Anywhere else, ask how long, and the answer changes the meaning of the number entirely.

Compound annual growth rate converts a total change into a per-year rate, which makes different periods comparable. That is genuinely useful and it is the standard for reporting scheme performance.

The assumption is that money went in once, on one date, and came out once. For a lump sum that is exactly what happened, so CAGR describes it well, as our page on lumpsum investment discusses.

It also smooths the path completely. A scheme that rose steadily and one that fell hard and recovered can show the same CAGR, and living through them was not remotely the same experience. The figure describes the two endpoints, not the journey between them.

This is the mistake most often made in good faith, including by people quoting their own results.

In a SIP the money did not go in once. Each instalment has its own date and its own duration, so this month instalment has been invested for weeks while the first one has been invested for years. There is no single period for CAGR to annualise.

Applying CAGR anyway, by treating the total invested as though it went in on day one, understates the result considerably, because most of the money was invested for far less than the full period. It is the arithmetic reason a first year looks like nothing, as our page on rupee cost averaging explains.

XIRR handles cash flows on different dates, which is exactly the situation a SIP creates. It finds the single annual rate that reconciles every payment on the date it was made with the value today.

That makes it the correct measure for anybody investing monthly, and for anybody whose holding has had additions and withdrawals over the years. Our XIRR calculator does the arithmetic if you have the dates and amounts.

Two practical notes. XIRR is sensitive to the timing of large flows, so a big addition shortly before the end can move it noticeably. And over a very short period it produces figures that look dramatic in both directions, which is a property of annualising a short window rather than information about the scheme.

Almost every figure you see quoted is point-to-point: from one date to another, both chosen by whoever is presenting it.

That choice does more work than most people realise. Shift the start by six months and the number changes, sometimes a great deal, without anything about the scheme having changed at all. It is the single easiest way to make a record look better than it was, and it requires saying nothing untrue.

This matters most for approaches that lag for long stretches by design. A value or contra scheme judged on a badly chosen three-year window will look far worse than the same scheme judged across many windows, and a focused scheme will look either brilliant or dreadful depending entirely on where the window fell.

Rolling returns fix that by calculating the same holding period repeatedly across many possible start dates and looking at the whole distribution. That answers a more useful question: not what an investor who started on one particular day got, but what a typical investor across many starting points got. Our page on the benchmark covers the other half of reading a number honestly.

Worth knowing, because the number people react to most is the one on their own screen and almost nobody checks what it is.

Some platforms show an absolute figure: current value against total invested, with no reference to time. That is honest and it is not comparable to anything, least of all to a scheme advertised rate. Others show an annualised figure computed from your actual dates, which is the XIRR approach and is the right one.

Over a short holding those two can look wildly different from each other, and neither is wrong. A holding a year old showing a small absolute gain may show a strikingly large or small annualised figure, purely because annualising a short period exaggerates.

So before comparing your figure with anything, find out which of the two you are looking at. If the platform does not say, the safest assumption is that it is not comparable to a published scheme return, which our page on the fact sheet describes.

Four questions, and most quoted figures do not survive the second one.

• Over what period, and who chose the start date?
• Which measure is that, and does it match how the money actually went in?
• Compared with what, meaning the scheme own stated benchmark rather than a convenient one?
• Direct or regular plan, since the figures differ and are not interchangeable, as our page on direct versus regular plans sets out.

None of this tells you what any investment will do next, and nothing on this site does. We publish no projections anywhere, and the calculators here only do arithmetic on assumptions you supply. If you want help reading what your own holdings have actually done, that is ordinary work and there is no charge for looking. Get in touch, and how to choose a mutual fund covers where these numbers sit in a decision.