XIRR is the Extended Internal Rate of Return which is used to compute the annualised rate of return on a portfolio with multiple entry and exit points. In this article, we will understand the importance of XIRR in mutual funds, the XIRR formula, and the difference between XIRR vs CAGR.
What is XIRR in Mutual Funds?
Let’s first understand “What is XIRR in Mutual Funds”. XIRR (Extended Internal Rate of Return) calculates annualised returns of the mutual fund by taking into account the investor’s multiple investments and withdrawal dates. This indicates a more realistic performance estimate for the particular investor. Unlike standard IRR calculations, XIRR considers variable investment amounts and withdrawal dates for each investor.
XIRR vs CAGR: What’s the Difference?
Both XIRR (Extended Internal Rate of Return) and CAGR (Compound Annual Growth Rate) are financial indicators but serve different purpose.
- XIRR is used to indicate the annualised return of the investor by taking into account variable amounts and dates (entry and exit) of the particular investor.
- CAGR is used to calculate annualised return of a particular asset/ fund on a point-to-point basis. It does not indicate the actual annualised returns of a particular investor.
In conclusion, XIRR is a better metric to analyse an investor’s portfolio while CAGR is a better metric to analyse a particular mutual fund/ asset with respect to its peers for the same time frame. XIRR of the Investor and CAGR of the Mutual Fund would converge if the investor has only one entry point in a single Mutual Fund.
Thinking of investing in mutual funds? Get your personalized SIPs.
How To Calculate XIRR Using Excel?
Calculating XIRR (Extended Internal Rate of Return) in Microsoft Excel is simple because the program includes a built-in function. Here’s a step-by-step guide to getting started:
- Create a column in Excel for cash flow values and another for the dates they correspond to. The initial investment should be negative (outflow), with subsequent investments or withdrawals being positive (inflows).
- Enter =XIRR (in the cell where you want the XIRR result).
- Select the range of cash flow values (excluding headers) by clicking and dragging.
- Enter a comma(,).
- To pick the range of corresponding dates (excluding headers), click and drag.
- Close with a parenthesis ).
- If you have an estimate for the XIRR, put it after the closing parenthesis.
- Press the Enter key.
- The XIRR figure will be displayed as a percentage in Excel, showing the annualised rate of return on your investment.
- You can format the cell with the XIRR value as a percentage to make the result more readable.
To make the result easier to read, format the cell containing the XIRR formula as a percentage. It is simple and quick to determine the annualised rate of return for investments with variable cash flows using Excel’s XIRR function.
Bottom Line
In contrast to other return metrics, XIRR gives a clear evaluation of the annualised returns of your mutual fund portfolio by taking into account the variable timing and amounts of investments and redemptions Calculating XIRR has become simple and necessary for determining the true returns of mutual fund investments. Using XIRR, investors can analyse their portfolios, check the success of their mutual fund investments and make wiser decisions.
Frequently Asked Questions
1. What is XIRR in Mutual Funds?
In mutual funds, XIRR (Extended Internal Rate of Return) is a financial term used to assess the annualised rate of return on an investment portfolio. It is utilised to account for irregular cash flows such as investments and withdrawals at different times. This shows the importance of XIRR in a client’s mutual fund portfolio.
2. What is a good XIRR?
A “good” XIRR is determined by your investment objectives, risk tolerance, and the specific investment at hand. A higher XIRR often suggests a better return on your investment. What is considered “good” can, however, vary. An XIRR greater than the rate of inflation can be sufficient in a low-risk environment. For higher-risk assets, you may want to strive for an XIRR that is much higher than that of safer options such as bonds.
3. How is XIRR Calculated?
XIRR (Extended Internal Rate of Return) is computed by determining the discount rate (r) that equals the sum of the present values of a series of cash flows. It takes into account the timing and magnitude of cash flows. This makes it appropriate for investments with irregular investments or withdrawals.
4. What is the difference between XIRR and Absolute Return?
XIRR (Extended Internal Rate of Return) is a measure of the annualised rate of return on an investment that takes into consideration the timing and amount of cash flows. Absolute Return, on the other hand, indicates the complete return on an investment. It does not take into account time or the starting investment amount. XIRR provides a detailed assessment of an investment’s annualised performance. Absolute Return provides a simple total return statistic that accounts for investment duration.
Leave a Reply