What is XIRR in Mutual Funds: Meaning, Calculation, And Example

Investors look at the returns of various mutual funds and see the terms CAGR, Annualised Return, XIRR, and several others. Among these returns, though, XIRR returns are the most accurate, especially with SIPs and other irregular funds.

You will learn what XIRR means, the workings of the XIRR calculation, the XIRR formula, and practical examples to clarify these concepts in this guide.

What Is XIRR in Mutual Funds?

XIRR means Extended Internal Rate of Return. It will accurately display your annual return earned on your mutual funds. Even if:

• Different amounts were invested.
• Different dates were invested.
• There were partial redemptions.
• There were stop-and-go SIPs.

That is why when someone asks what is XIRR in mutual funds? The simplest answer is that XIRR is the most precise way of calculating your mutual funds return when there are varying transactions over time.'

Essentially, XIRR meaning = actual return on your investments, considering all the cash movements in and out of the account.

Why XIRR Is Better Than CAGR Or Simple Returns

Most people mistakenly assume CAGR is enough to consider in measuring returns, but CAGR only applies to:

• One-time lump-sum investment.
• Same amount invested for the entire time.
• No intermediate deposits or withdrawals.

However, in real life, investors do SIPs, top-ups, redemptions, and switches. That is why having the XIRR mutual funds calculation is necessary. Here is the reason why XIRR is considered the gold standard:Is applicable for irregular investments.

SIP amounts can differ from one another and the XIRR will adjust accordingly.

 

 

Is applicable for irregular time investments

If you were to invest one Rs. 10,000 today and then another Rs. 5,000 in a time span of 2 months, the XIRR will be able to manage that situation. 

Allows for Partial Withdrawals

Your returns remain accurate even if you redeem some units.

Provides Returns in % Annually.

XIRR calculates returns in % annually, allowing for seamless comparisons.

Meaning of XIRR with an Illustration

Suppose, you made an investment in a mutual fund in this fashion:

Date	Amount (₹)
Jan 10	-10,000
Feb 10	-10,000
Mar 10	-10,000
Current Value	+35,000

 

(Investments have a negative sign since the money is going OUT of your pocket), (Current values of positive sign mean money is coming IN to you)

Calculating this value systematically may lead you to a conclusion like this:

Amount Invested = Rs. 30,000

Amount is Current Value = Rs. 35,000

Amount of Profit = Rs. 5,000.

This, however, does NOT represent the true value of time since the first SIP had much more time to grow compared to the second SIP. Now, with XIRR calculation, you get the true value of annual return computed over time with consideration of the exact date. XIRR takes even SIP periods of 3 months, and converts the overall return to a yearly % value.

Using the XIRR formula

First, it's important to explain how the XIRR formula functions in either Excel or Google Sheets: 

 

Where:  

Ci= Cash flow (Investment = negative, redemption = positive)  

di= Transaction date  

d0= Date of first transaction  

r= XIRR (rate of return we want to find)

Software is thus a requirement for XIRR calculations, as XIRR is rather complicated.

XIRR Function in Excel: This is how to obtain XIRR

Returns in Excelusing the formula `XIRR` can be calculated using the following method:

STEP 1. Entering Date

Example:

A Column (Dates)

10-01-2024

10-02-2024

10-03-2024

10-07-2024

 

STEP 2. Entering Amounts

Investments = negative, Redemption/Value = positive  

B Column (Amounts)

-10000

-10000

-10000

35000

 

STEP 3. Using the XIRR Function

In any empty cell, input the following:

 =XIRR(B1:B4, A1:A4)  

Excel then, will calculate the actual annual return for you!

XIRR Calculation Through Mutual Fund Apps

Investors do not have to use Excel because the AMC website or broker/app shows the information needed.

• XIRR Returns
• Absolute Returns
• CAGR
• Portfolio IRR.

AMC apps like Groww, Zerodha, and ET Money use the XIRR Formula to calculate SIP returns. So next time someone asks, “Why do my SIP returns show XIRR?” you can confidently answer. SIP investments are made on different dates and for different amounts and are the only ones that can accurately calculate your returns.

XIRR vs CAGR: What is Different?

Feature	XIRR	CAGR
Works for SIP?	Yes	No
Works for irregular investments?	Yes	No
Considers cash flow timing?	Yes	No
Best for?	SIP + multiple transactions	Single lumpsum
Shows real return?	⭐⭐⭐⭐⭐	⭐⭐⭐

 

So if you invest monthly, make sure to stick to XIRR mutual funds return.

XIRR Example for SIP: Easy to Understand

Let’s say this is your SIP:

 

Month	SIP Amount
Jan	₹5,000
Feb	₹5,000
Mar	₹5,000
Apr	₹5,000
Current Value	₹24,000

 

XIRR will take into account:

• The dates of the SIP
• The amount of the SIP
• The time each SIP was invested

Your return may end up being: XIRR = 14.65% per annum. That is your real return after time is accounted for.

 

 

When Does XIRR Give Wrong or Misleading Results?

XIRR is useful and in-depth; however, it can sometimes be misleading. For example:

Very short durations

In the case of SIP being 1-2 months only, XIRR may substantiate an unrealistic percentage like 200% for example.

Huge Single Redemptions 

A significant positive cash flow at the end can skew the cash flow statement.

Erratic SIPs

What goes on can get a bit complicated if the cash flows are irregular.

However, with consistent SIPs and long-term investments, XIRR is the best calculation.

The Benefits of XIRR for Investors

XIRR Helps In Answering the Below Questions:

Is My SIP Aligned with My Benchmark?

Comparing the fund's XIRR and the index's CAGR would provide clarification.

Is It Time to Exit the Fund?

You may consider exiting if the XIRR is consistently low.

Does One Mutual Fund Outperform the Other?

You can compare the XIRR of both funds.

What Is My XIRR?

It gives you an accurate estimation of the growth of the portfolio.

XIRR in Long-Term Investments: A Case Study

Consider the following situation:

Total investment over a period of 5 years = ₹3,00,000 

Current worth = ₹4,20,000

It would seem that the profit is ₹1,20,000 on the surface, but that is an oversimplification. That is because you do not take the annualised growth into account.

Calculating for XIRR:

XIRR = 11.8%

That is, you have made about 12% on a constant basis per annum, and that is on a monthly contribution basis. That is why, for long-term SIP investors, XIRR is the best metric.

 XIRR Meaning in Mutual Funds

XIRR calculates your annual returns based on the inflows and outflows from your mutual fund, and the dates of your cash flows.

 

 

Conclusion 

XIRR value would help every SIP investor understand what XIRR in mutual funds means. It gives the most precise measurement of return by factoring in dates of investments, withdrawal amounts, and dates, if applicable, over the investment period. Whether to evaluate a return on the investment (ROI), benchmark different investment options or devise a plan for future investments, the XIRR calculation shows the reality of net annual inflows on investment over a period of time. 

Provided the XIRR formula is correctly applied, every investor can, without much difficulty, understand the performance of the investments and plan wisely for future investments.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.