Investors in mutual funds often seek clarity on the actual performance of their investments, especially when dealing with irregular cash flows. The traditional methods of measuring returns may not able to provide an accurate representation of the investment journey. This is where XIRR, or Extended Internal Rate of Return, steps in as a powerful tool to calculate the annualized rate of return for a series of cash flows with different cash flow intervals.
What is XIRR?
Extended Internal Rate of Return (XIRR) is a financial metric designed to offer a more realistic measure of investment performance by considering the specific timing of cash inflows and outflows. Unlike simple average returns, which assume equal intervals between transactions, XIRR accurately reflects the irregular nature of contributions and redemptions in mutual fund investments.
For instance, investments like SIPs have dynamic cash flows. You may invest for 9 months, skip 2 months, and resume investing again. Alternatively, the SIP amount can change at regular intervals, or you might redeem a portion of your investment.
Use our SIP Calculator to estimate returns on your investments
Therefore, XIRR is the best metric for calculating investment returns with multiple transactions and not evenly spaced. Also, it can give the total value of your investment, including all instalments and redemptions.
XIRR Calculation: Step-by-Step Process
XIRR can be calculated using the Microsoft Excel spreadsheet with its in-built formula, which is as follows –
XIRR in excel = XIRR (values, dates, guess)
Where,
-
Values – represent a series of cash flows
-
Dates – represents a series of dates against each cash flow
-
Guess – the estimated value of XIRR will be
Steps to calculate XIRR in Excel
-
Enter all the cash inflows and outflows in column A. All outflows, like investments, mark the values as negative. Similarly, for inflows, like redemptions, dividends received, etc., mark the values as positive.
-
In column B, enter the date of all transactions.
-
Lastly, enter the current value of holdings and the current date of the transaction.
-
Now enter the formula in Excel, i.e. XIRR function “=XIRR(values, date, guess)”. Press enter and multiply the arrived value by 100 to get the XIRR. The guess parameter is optional in the formula.
Example: Calculating XIRR in Excel
Let us understand with the help of an example with a 6-month SIP in a mutual fund scheme -
Here’s how the XIRR of a 6-month SIP in a mutual fund scheme will be calculated in Excel-
SIP Amount= ₹5,000
SIP Investment Period= 1/6/22 to 1/11/22
Redemption= 1/12/22
Maturity Amount= ₹33,000
After entering the XIRR formula, the result is 36.97%.
The manual XIRR calculation is complex and time-consuming. This tool and calculation is available on many online platforms where you can easily calculate the XIRR of your investment.
Select the Best SIP to Invest with Sigfyn
How is XIRR Different from CAGR?
The Compound Annualised Growth Rate (CAGR) is an absolute annualised return that calculates returns generated on every instalment or investment and does not consider the inflows/outflows. On the other hand, XIRR considers every inflow and outflow to provide a CAGR average.
The major differences between CAGR vs XIRR are –
Conclusion
XIRR proves to be a valuable tool for investors seeking a precise understanding of the performance of their mutual fund investments. By considering the irregular timing of cash flows, XIRR provides a more accurate measure than traditional methods. As investors, leveraging tools like XIRR ensures informed decision-making and a clearer perspective on investment returns.
Sigfyn also helps calculate your XIRR for every investment scheme to give you a clear performance comparison.
Know more about HDFC Mutual Funds
