XIRR In Mutual Funds: What Is It & How It Works

XIRR Meaning: What Is XIRR

XIRR or extended internal rate of return is a single rate of return that provides the current value of the entire investment when applied to each systematic investment plan (SIP). 

It is used where many transactions happen during a period. At times, one can redeem a small amount from their investments. On the other hand, investors can pause several months of investments. In such instances calculating the returns becomes easier with XIRR. 

Investment cash flows are dynamic. In other words, they are never evenly spaced out. It is standard for an investment scheme to have early withdrawals or late deposits. Investors can skip a couple of months of installments. 

In these conditions, calculating the return from your investment scheme becomes difficult. However, with XIRR, you can easily calculate your returns.

Fortunately, you can use the XIRR formula in Excel to calculate uneven cash flow intervals.

How Does XIRR Work?

You look at returns whenever you invest in asset classes such as real estate, stocks, mutual funds, fixed deposits, or any other instrument. You generally calculate the percentage by figuring out how much profit you make over the investment. 

Assume you invest INR 10 lakh in a mutual fund and after a certain period, you sell the units and get INR 18 lakh. In this case, the return is: (8 lakh/10 lakh) x 100 = 80%

However, is this information sufficient for you to make a decision? 

The answer is “no”. You should be aware of certain intricacies to make an informed decision. You should know the period in which your investment generates 80% returns. 

XIRR vs CAGR Explained

Let us assume that you invested INR 10 lakh in 2010 and got INR 18 lakh in 2022. So, it took 12 years to generate 80% returns. 

Is it sufficient?

To find the answer, you need to know which integral method to find the returns—it is CAGR. Also known as compound annual growth rate, CAGR tells you how your money grew yearly during the entire period that led to the corpus. 

So, if you find the CAGR for the above example:

• Investment Year – 2010
• Investment Amount – INR 10 lakh
• Maturity Year – 2022
• Maturity Amount – INR 18 lakh
• Absolute Returns – 80%
• Time – 12 years
• CAGR – 5%

It means 10 lakh grew 5% yearly and got compounded to become INR 18 lakh in 12 years. Now is it enough? The answer is still a “no” because it doesn’t beat inflation. 

Now what happens if you invest INR 10 lakh every year or every month?

Will CAGR work? CAGR only works when you make systematic investments. While you can always calculate CAGR, there needs to be a better picture. It would help if you use the other important metric, theXIRR.

Why Does XIRR in Mutual Fund Makes Financial Sense? 

Assume you started a SIP of INR 6,945 in 2010, and in 2022 you took away INR 18 lakh.

So, what will be the return in this case?

Let us see the math before we see the returns:

• Number of Months – 144
• Monthly Contribution – INR 6,945
• Invested Amount – INR 10,00,000
• Maturity Amount – INR 18,00,000
• Returns (XIRR) – 9% to 10%

So, your investment choice is average, and this could be a debt fund. 

What changed from the first example despite every number remaining the same? It is a series of investments made which brings the concept of the time value of money. In the first example—you invested INR 10 lakh in 2010, and your money takes 12 years to grow. 

In example two, you contribute INR 6,945 every month. Thus, the first SIP contribution of January 2010 gets the entire 12 years to grow, but the last SIP of December 2021 only gets one month to grow. Thus, with the time value of money being a critical concept, you should use XIRR.

How To Calculate XIRR Using Excel? 

Here is the step-by-step process of calculating XIRR in MS Excel.

• Enter all your SIPs or transactions in one column in negative. Wherever there is an interest inflow, show it as a positive figure.
• In the corresponding column, add the date of the transaction. 
• In the last row, mention the current value of your portfolio in mutual funds. You should also input the correct date. 
• Now you can use the XIRR function (in excel). XIRR usually contains values, dates, etc. 
• It will help if you choose values for a series of cash flows related to payments based on dates. The column made separately for the date is applicable. Input the values accordingly. Note that the guessing parameter is optional. 

Bottom Line

It is difficult to say which XIRR is good as it is subjective to every individual, their objective, investment time horizon, investment process, investment philosophy, investment instruments, and risk appetite.

Generally, an XIRR over 12% for equity mutual funds is considered good, and for debt mutual funds, anything above 7.5% is considered good. It is important to be careful while selecting your investments and speak to a financial expert to find out which investment agrees with your financial goals. 

Wise investing