What is XIRR in Mutual Fund? How XIRR is Calculated?

When we invest money in financial instruments like mutual funds, we often check our gains by comparing the amount we originally invested with the maturity amount we received after a period of 5, 10, or 15 years. However, this straightforward comparison might not be the most accurate way to measure our investment gains.

The returns on our investments are a crucial factor. They show how much our investment has grown or lost over a specific period. Returns are a basic benchmark for investors, helping them evaluate the performance of their investments.

Returns can be expressed in various ways and using different terms, which can sometimes be confusing. Understanding these different expressions of returns is important for making informed investment decisions and accurately assessing how well our investments are performing

What is XIRR in Mutual Fund?

XIRR, or extended internal rate of return, is a financial measure that calculates the annualized rate of return for investments with irregular cash flows.

Unlike simple return measures like ROI (return on investment) or CAGR (compound annual growth rate), which assume cash flows happen at regular intervals, XIRR accounts for varying times and amounts of cash inflows and outflows. This makes XIRR especially useful for evaluating investments like mutual funds, systematic investment plans (SIPs), or any situation where cash flows are not evenly spaced.

In simple terms, XIRR gives a single rate of return that shows how profitable an investment is over time, considering when and how much money was added or withdrawn. By taking these irregularities into account, XIRR provides a more accurate measure of investment performance, helping investors make better decisions about their portfolios. It is often calculated using spreadsheet software like Microsoft Excel, which has built-in functions for computing XIRR based on the provided cash flow data and dates.

How XIRR is Calculated?

You can easily calculate XIRR using Microsoft Excel. Excel has a built-in function specifically for this purpose.

XIRR is a powerful tool in Excel for calculating the annualized return on investments with irregular cash flows.

To use the XIRR formula in Excel, you enter: =XIRR(values, dates, guess).

Step-by-Step Process to Calculate XIRR in Excel

1. Enter Transactions:

List all your transactions in one column. Mark outflows (investments, purchases) as negative values. Mark inflows (redemptions) as positive values.

2. Add Corresponding Dates:

In the next column, enter the date for each transaction.

3. Add Current Value and Date:

In the last row, enter the current value of your holding as a positive value. Enter the current date next to it.

4. Use the XIRR Function:

Type =XIRR(values, dates, guess) in a cell.

"Values" refers to the column of cash flows.

"Dates" refers to the column of corresponding dates.

"Guess" is optional; if you leave it out, Excel will use a default value of 0.1.

This method will give you the annualized rate of return for your investment, accounting for the timing and amount of each cash flow.