Ask most investors what their SIP has returned and you'll get a number that compares total invested to current value. That's not wrong, but it's incomplete — because it treats money invested last month the same as money invested five years ago.
What XIRR actually measures
XIRR, or Extended Internal Rate of Return, accounts for the timing and size of every individual cash flow — every SIP instalment, every top-up, every partial redemption — and calculates a single annualised rate that reflects what your money actually earned, given when it went in and came out.
Why simple returns can mislead
A fund that's up 40% since you started might sound impressive, but if most of that growth happened before your bigger instalments went in, your personal XIRR could be far lower than the fund's point-to-point return. Conversely, disciplined SIPs through a volatile period can post a healthier XIRR than the headline number suggests.
Reading it correctly
A single XIRR figure is most useful compared against a relevant benchmark and your own goal timeline — not against another investor's number, since no two portfolios have identical cash flow timing.