XIRR, or Extended Internal Rate of Return, is a powerful financial metric that assesses the performance of investment funds. The XIRR estimates the annualized return on periodic as well as irregular investments with multiple cash flows. Unlike traditional metrics like the CAGR, XIRR is more accurate as it considers the exact timing and amount of cash flows. In this article, we will explore how XIRR can help you make informed decisions and have a better understanding of the returns generated by investments in your ULIP and mutual funds.
Guaranteed Tax SavingsUnder sec 80C & 10(10D)^
₹ 1 CroreInvest 10k Per Month*
Zero LTCG TaxUnlike 10% in Mutual Funds
XIRR stands for Extended Internal Rate of Return. It is a method used to calculate the returns on investments where there are multiple transactions happening at different times. This is in contrast to the Compound Annual Growth Rate (CAGR), which is only applicable to investments with a single cash flow.
XIRR is commonly used to calculate the returns on Systematic Investment Plans (SIPs) in the following investment options:
Unit Linked Insurance Plan funds ( or ULIP funds)
A SIP is a method of investing a fixed amount of money in an investment fund every month. There is an online SIP calculator to get the estimated returns on SIP investment. As there are multiple cash flows happening at different times, making it difficult to calculate the returns using CAGR.
To calculate XIRR in a mutual fund or ULIP fund, you need to know the following information:
Monthly Investment Amount
Date of Each Investment
NAV of the ULIP Fund/ Mutual Fund on the Date of Each Investment
It is essential to calculate XIRR in a mutual fund and ULIP fund for several reasons, some of which are as follows:
To Get a More Accurate Measure of Your Returns: In the case of ULIP funds and mutual funds, you may invest in lump sums or through SIPs, which involve multiple cash flows happening at different times. XIRR takes into account the timing of all the cash flows, which gives you a more accurate measure of your returns.
To Compare the Returns of Different Investments: If you compare the returns of two mutual funds or two ULIP funds, one with lump sum investment and the other with SIP investment, you cannot use CAGR to do this. This is because the two funds will have different cash flow patterns. XIRR can be used to compare the returns of various best investment options, regardless of their cash flow patterns.
To Track the Performance of Your Investments Over Time: XIRR can be used to track the performance of your investments over time, even if you have made multiple withdrawals or investments. This can help you to make necessary adjustments to your investment strategy.
To Make Better Investment Decisions: By understanding the XIRR of your investments, you can make better investment decisions. For example, if you are investing for a long period, you may be willing to accept a lower XIRR in exchange for lower risk.
XIRR calculates the interest rate that, when applied to your investment over its duration, would yield the same final value as your actual investment. It does this by trial and error, testing different interest rates until it finds one that produces the desired ending value.
XIRR = (NPV(Cash Flows, r) / Initial Investment) * 100
NPV = Net present value of the cash flows
R = Interest rate
Initial Investment = Invested Amount
Cash Flows = Amounts invested and withdrawn over the period of the investment
Suppose you make investments as per the following details:
Deposit Amount on 01 January = Rs. 10,000
Withdrawal Amount on 01 July = Rs. 2,000
Balance Amount on 31 December = Rs. 11,000
The XIRR for this investment would be about 10%
Explanation: The XIRR value means that if you had invested Rs. 10,000 at the beginning of the year and compounded it at 10% interest, you would have ended up with Rs. 11,000 at the end of the year.
Follow the steps mentioned below to calculate the XIRR in a Mutual Fund or a ULIP Fund using MS Excel:
Step 1: Enter the cash flows in a column in Excel. The cash flows should be in chronological order, with the dates in the first column and the amounts in the second column.
Step 2: Select the cell where you want to display the XIRR.
Step 3: Type the following XIRR formula and press "Enter":
= XIRR (cash flows, dates)
Cash Flows: The range of cells that contain the cash flows
Dates: The range of cells that contain the dates of the cash flows
Step 4: Excel will calculate the XIRR and display it in the selected cell.
People Also Read: Best SIP Plans
The key benefits of calculating XIRR in a mutual fund or a ULIP fund are listed below:
Accuracy: XIRR is a more accurate measure of returns than CAGR because it considers the timing of all the cash flows. This is important for ULIP and mutual funds, where you typically make multiple investments over time.
Consistency: XIRR is a consistent measure of returns, even if the cash flows are irregular. This is in contrast to CAGR, which can be misleading if the cash flows are irregular.
Flexibility: XIRR can be used to calculate the returns of any investment, regardless of the cash flow pattern. This makes it a versatile tool for measuring investment performance.
Transparency: XIRR is a transparent measure of returns, as it is based on the actual cash flows. This makes it easy for you to understand how your investments are performing.
Relevance: XIRR is a relevant measure of returns for ULIP funds and mutual funds, as it considers the fees and expenses associated with these investments. This makes it a more accurate estimate of the actual returns that you can expect to earn.
The key differences between XIRR and CAGR are mentioned in the table below:
|Full form||Extended Internal Rate of Return||Compound Annual Growth Rate|
|Calculation||It considers the exact timing and amount of cash flows, making it suitable for irregular investments and withdrawals.||It assumes a constant rate of growth over a specified period, regardless of cash flow timing.|
|Applicability||Applicable on investments with multiple cash flows||Applicable on investments with a single cash flow|
|Accuracy||Provides a more precise measure of investment performance by accounting for cash flow timing.||It may not accurately reflect the actual performance if there are irregular cash flows.|
|Flexibility||It can be used to calculate the returns of any investment, regardless of the cash flow pattern.||It can only be used to calculate the returns of investments with a single cash flow.|
XIRR (Extended Internal Rate of Return) is a valuable metric for evaluating the performance of ULIP and mutual funds. It provides you with a comprehensive view of your returns, accounting for the timing and amount of your investments. By considering both inflows and outflows, XIRR offers a more accurate representation of an investment fund's performance, helping you to make informed decisions about your investments.
Values: An array of cash flows, where a negative value represents an outflow and a positive value represents an inflow.
Dates: An array of dates corresponding to the cash flows.
Guess: An optional argument that provides an initial guess for the XIRR. If omitted, Excel will use a default value of 10%.
*All savings are provided by the insurer as per the IRDAI approved
insurance plan. Standard T&C Apply
Tax benefit is subject to changes in tax laws. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^10(10D) Tax benefit are for Investments made up to Rs.2.5 L/ yr and are subject to change as per tax laws.
Expected Rate of Return (Yearly)
29 Aug 2023Index Fund SIP (Systematic Investment Plan) Investment has
17 Aug 2023A Systematic Investment Plan or SIP Plan for 20 years is the
14 Aug 2023The Tata AIA SIP Calculator is a free online tool that helps you
09 Aug 2023Step Up Systematic Investment Plan or Step Up SIP is a dynamic
09 Aug 2023HSBC SIP (Systematic Investment Plan) is a small and disciplined