XIRR in Mutual Funds
- 6 min read
We all know that SIP returns seem different from lump sum returns. But have you ever wondered about the mechanism behind it? A mutual fund XIRR makes you understand your actual returns in a systematic investment plan (SIP).
Most of the novice investors choose CAGR while calculating SIP returns, but an XIRR shows you the real picture. This blog explains what is XIRR in mutual funds, why it is important, its calculation, and how it is different from the CAGR.
What Does XIRR Mean?
An XIRR in mutual funds, or extended internal rate of return, is a single rate of return in mutual funds. It tells about the current value of the total investment, particularly in each instalment of your SIP. It is the actual return on your investments.
Investment cash flows can be dynamic. For example, if you start a SIP and can continue it for 6 months. You can skip the instalment for 2 months, and then resume it. Additionally, you may also keep changing the SIP amount in regular intervals or even redeem some part of the investment.
You can use XIRR to calculate your investment returns with multiple transactions which are not evenly spaced, just like this example. This rate can give the total value of your investment as it is applied to all the instalments and redemptions.
Significance of XIRR in Mutual Funds
Now that you have an idea of what is XIRR in mutual funds, let us understand its significance.
Since it provides an accurate calculation of investment returns over time, XIRR is crucial for evaluating mutual fund returns. XIRR provides a more realistic representation of an investor’s experience by taking into account the timing of each cash flow, in contrast to basic annualised returns.
If you invest in mutual fund online, especially in SIPs, where investments and withdrawals can be made at different times, this is especially crucial. Below are the reasons why XIRR is important in mutual funds.
-
Precise Evaluation of Returns
The amount and timing of each cash flow are taken into account by XIRR. This helps to provide an accurate evaluation of returns. For investors who have made several transactions along their financial journey, this is very helpful.
-
Appropriate for Systematic Investments
Considering the staggered structure of these investments, XIRR efficiently calculates the annualised return for those using a SIP method with regular payments.
-
Calculating Overall Gains
Overall gains might be greatly impacted by redemptions. Here, XIRR provides an accurate view of the performance of your investment, which accounts for all withdrawals.
How to Calculate XIRR in Mutual Funds?
You can use MS Excel or Google Sheets to calculate XIRR in mutual funds. Follow the steps below to consider multiple transactions:
- Enter the date of your transactions in Column A and enter the cash flows in Column B. Mark your investments as negative and the redemption amount as positive.
- Add the current date and the investment’s current value in the last row. This will be regarded as the inflow or redemption.
- Now, enter the XIRR formula to calculate the returns. The formula is =XIRR (values, dates). The sequence of cash flows, both positive and negative, is represented by the ‘values’. The dates for the cash flows are represented by the ‘dates’.
Example of XIRR Calculation Using Excel
Let us use an example to help you understand the calculation of XIRR in mutual funds with Excel.
Suppose we have:
- SIP amount: INR 5000 per month
- Investment dates starting from 01/01/2023 and ending on 01/06/2023
- Redemption date is 01/12/2024
- Maturity amount is INR 40,000
Follow the steps below to make the XIRR calculation in Excel for this example:
- Enter the details – A2: 01-01-2023, A3: 01-02-2023, A4: 01-03-2023, and so on until A7: 01-06-2023. Put 01-12-24 in A8, which is the redemption date.
- Enter the cash flows or SIP amount in Column B. B2: -5000, B3: -5000, B4: -5000, and so on until B7: -5000. Enter 40,000 in B8, which is your redemption amount.
- In the next empty cell, C2, enter the formula: =XIRR(B1:B7, A1:A7)
- Press enter, and the rate of return will be determined by the XIRR function. You will see a value of 18.28% displayed on C2. This is your XIRR in this investment.
What is the Difference Between XIRR and CAGR?
A lot of novice investors get confused about what is XIRR in mutual funds and how it is different from a compound annual growth rate (CAGR).
In CAGR, the inflows and outflows are not taken into account, even though it can calculate the profits you made on each instalment. Conversely, XIRR is a rate that provides an aggregate CAGR average by accounting for each input and outflow. Below are some key distinctions between these two:
| Parameters | CAGR | XIRR |
| Type of return | Absolute annualised return | Average annualised return |
| Values | Takes into account the initial value, investment tenure, and final value | Takes every inflow and outflow of cash into account |
| Type of investment | Ideal for lump-sum investments | Ideal for SIPs with numerous inflows and outflows |
Final Thought
Understanding what is XIRR in mutual funds is crucial since it is the most accurate method for determining your actual investment returns. While CAGR should be considered while choosing a lump sum investment, XIRR is essential for assessing the returns on your SIP investments.
If you want to start an SIP, open a Demat account with PL Capital Group – Prabhudas Lilladher for free. You can start SIP with as low as INR 100 per month with your preferred mutual fund schemes.
Frequently Asked Questions
1. Is XIRR a better method than CAGR?
Both XIRR and CAGR have different purposes. While CAGR is suitable for calculating consistent growth, XIRR is appropriate for irregular cash flows.
2. What is a perfect XIRR in mutual funds?
There is no specific XIRR, which can be considered perfect. It varies depending on an individual’s risk tolerance and goals.
3. What is the difference between XIRR and absolute return?
An absolute return is the total return according to an investment’s future value and its initial amount, without considering the cash flow timing. Conversely, XIRR in mutual funds also analyses the returns by considering the amount and timing of the cash flow.
4. How to improve XIRR?
To improve an XIRR, you have to focus on timely and consistent investment in your SIP.
PL Blog
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
