What is XIRR in Mutual Funds? Importance and Calculation

# What is XIRR in Mutual Funds? Importance and Calculation

by Jithin Jaison

00:00 / 00:00

Investment performance is one of the major factors any investor would look for before investing their hard-earned money into any funds. Though many financial metrics are employed to understand the fund’s performance, XIRR holds a prominent position among them.

In this article, you will understand the meaning, and importance of XIRR and how they work in analysing a fund so that you can evaluate your fund’s overall performance.

## XIRR Meaning in Mutual fund

XIRR stands for Extended Internal Rate of Return. This is an important financial metric generally used in mutual funds to evaluate the yearly return on investments that have regular or irregular cash flows.

When compared to other traditional metrics such as simple return or CAGR, XIRR provides a more accurate and realistic measure of an investment’s performance especially when multiple investments and withdrawals take place over time.

This makes it useful in mutual funds where there are systematic investment plans (SIPs) at different time durations. XIRR provides a single rate of return by computing of each investment cycle made in a SIP. Thus providing a more accurate picture of the returns.

For example, consider you started investing in a mutual fund with Rs. 1000 as an initial investment on Jan 1st, then invested Rs. 5000 on March 3rd, then another Rs. 800 on June 30th and has continued it for 3 years. Assume at the end of 36 months your investment totalled a sum of Rs. 50,000. Since this investment includes investing and withdrawals at different time durations, XIRR incorporates all the cashflows and provides the returns of the investment.

## Importance of Calculating XIRR

### 1. Accurate Performance Measurement

XIRR, unlike general yearly returns or IRR, takes into account the amounts invested and taken out at different times. This allows investors to gain an accurate understanding of how their investments are doing. This is suitable for investors whose cashflows are not consistent.

### 2. Enhanced Decision Making

It takes into account both the timing and amounts of all cash inflows and outflows, providing a single percentage return that can be used to compare different investments. This can help the investors understand the fund’s performance and decide whether to stay invested or withdraw their money.

### 3. Real-time Assessment

Unlike other measures that may ignore nuances of real-time investing, XIRR takes into account actual dates of cash flows and thus provides an accurate picture of investment benefits. XIRR function aids in comparing returns on various assets for investors with different cash flow patterns. This is a vital element to consider when it comes to managing and optimizing a portfolio.

## How to Calculate XIRR using Simple Steps

### Step 1: Enter Data into a Spreadsheet

Open a spreadsheet application like Excel or Google Sheets and enter the data in two columns: one for dates and one for transaction amounts.

The transaction particulars would include the following items:

• Investment amounts (It is mentioned as negative as it is an outflow of money from your account.)

• Withdrawals or redemptions (It is mentioned as positive as it is an inflow of money from your account.)

### Step 2: Use the XIRR Function

In a cell where you want to display the XIRR result, use the XIRR function. The syntax for the XIRR function is: =XIRR(values,dates)

• values: The range of cells containing the transaction amounts.

• dates:   The range of cells containing the corresponding dates.

### Step 3: Interpret the Result

The XIRR function will provide the annualised return rate based on the given cash flows and dates. This result represents the annualised internal rate of return for your investment.

## Understand How to use XIRR using an Example

### 1. Open Excel and Enter Your Data

• Open Excel and create a new worksheet.

• Input the data into two columns: one for dates and one for cash flows.

Note: The date should be mentioned in MM/DD/YYYY format.

### 2. Enter the XIRR Formula

Type the XIRR formula into the selected cell: =XIRR(B2:B5, A2:A5) and press Enter.

Note: B2:B5 is the range of cash flows.

A2:A5 is the range of dates.

### Figure showing calculation of XIRR using Excel3. Interpret the Result

The cell will show the annualised rate of return for the investment. For example, if the result is 14.35%, the annualised return on your investment is 14.35%.

Using XIRR in Excel is a straightforward process for calculating the annualized rate of return on investments with irregular cash flows. By entering your cash flows and dates into Excel and applying the XIRR formula, you can efficiently determine your investment’s performance.

Get accurate insights into your mutual fund investments and XIRR by using our latest finance calculators: Mutual Fund Calculator, SIP Calculator, and Step Up SIP Calculator

## Difference between CAGR and XIRR

 Basis CAGR XIRR Meaning It provides an annualised compounded return on investment. It provides an average return earned by the investor after considering periodic cashflows separately. Calculation Values Initial value, investment duration and the final value It includes every inflow and outflow of cash Applicable to It is more suitable for lump sum It is more suitable for SIPs with multiple cash inflows and outflows. Complexity Simpler as it is easier to calculate. It is relatively complex as it requires data on detailed cash flows.

## What is a Good XIRR in Mutual Funds?

No proven value can be taken as a good XIRR as they are determined based on individual perceptions like investment goals, time horizon and risk appetite. But ideally, it is considered a good XIRR if the value exceeds the average market return.

## Conclusion

XIRR takes into consideration precise dates and amounts hence it’s able to give a better assessment of the performance when compared with the traditional methods. In this way, it assists investors in comprehending real returns, managing cash inflow and outflow, and making wise choices. Using XIRR in Excel simplifies this process: investors can efficiently gauge performance by entering cash flows and dates and applying the XIRR formula. Leveraging XIRR helps investors manage portfolios better and optimize returns for long-term success.

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