What is XIRR?
When we want to invest in a mutual fund first we check its returns of past 3 years, 5 year etc. These returns are point to point returns and are called Compounded Annual Growth Rate or CAGR.
For example, 3 year returns of 12% for a mutual fund X will mean that 10,000 Rs. invested 3 years ago have now become 14,049.28 Rs.
CAGR can be simply calculated by the formula
CAGR = (Ending Amount/Beginning Amount)(1/No. of years) – 1
Hence in the above example:
CAGR = (14,049.28/10,000)(1/3) – 1 = (1.4049)0.33 – 1 = 1.12 – 1 = 0.12 = 12%
However, in real life the investments & redemptions happen over different period of time and CAGR won’t be applicable to calculate the returns. For example, you may invest 50,000 Rs. on 1st July 2017, then 20,000 Rs. on 20th September and then withdraw 15,000 Rs. on 1st December and the amount in your mutual fund account is 65,000 Rs. on 1st July 2018. You cannot find the return on your investment in this case from CAGR.
For such cases XIRR is used to find the return.
XIRR is the short form of Extended Internal Rate of Return and is used to find the Return from investments done at different time periods.
Unlike CAGR, XIRR cannot be calculate by a formula and we have to use excel to calculate it.
XIRR formula in excel is
XIRR = XIRR(value,dates,guess)
Values are the transaction amounts, dates are the transaction dates and guess is the approximate return.
Let us calculate XIRR for above example:
The invested amount and amount redeemed (or current value) should have opposite signs (positive or negative) for the purpose of calculation.
As, you can see from the above examples, XIRR is the right way to find out your investment returns in real life. CAGR is important to check for selection of a fund but XIRR is critical to evaluate the returns you got from your investments.
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