What is XIRR in Mutual Funds?

Mutual fund investors choose investment horizons as per their goals. Some may invest less than 3 years, while others may invest for more than 5 years. Post the maturity of a scheme; you may want to redeem your investments. At that time, you would want to know the returns you have gained over a period.Calculating how much the fund has lost or gained is one of the basic aspects that every investor should be familiar with. In fact, estimating the rate of returns for investors using the SIP mode can be confusing because there are multiple transactions and redemption. For this purpose, an Extended Internal Rate of Return or XIRR can be an ideal tool for an investor to arrive at an exact figure for the transactions done at various intervals.

XIRR or Extended Internal Rate of Return is a tool that helps investors to calculate the returns on transactions made at different times. Usually, it is commonly used to estimate returns that an investor has garnered through SIP. Since SIP involves multiple investments and the time periods are different for each installment, the calculation of each investment can be tricky. XIRR can be beneficial in helping you know how much returns you will derive on a particular installment.For instance, Mr Raj has invested in mutual funds through Systematic Investment Plan (SIP) mode. He has a significant amount of withdrawals happening; at the same time, he deals with several cash outflows. Dealing with multiple transactions can cause confusion. Under such circumstances, it becomes easier to know the exact rate of returns with the help of XIRR. So, whenever multiple transactions happen through SIP, STP or SWP, the calculation of returns using the XIRR tool will give an accurate figure for that particular investment period.

XIRR represents a rate of return for single investment in mutual funds. The XIRR in mutual funds as a method is useful to find out how much you have earned from your investments in comparison to the spending that is spread over a period of time.

Let’s understand how investors can calculate XIRR in mutual funds:Assuming that you invest a sum of Rs.4000, Rs.9000, Rs.5000, Rs.4000 & Rs.6500 in a period of 5 years and you are eligible to get Rs. 53000 at the time of maturity with the returns on investment at 22%. In the case of mutual funds, there are going to be instances where you invest and redeem the securities at irregular intervals. As an investor, you would want to understand how much is the cash inflow and outflow at different points in time. Here, the concept of XIRR becomes pivotal.So, XIRR is a good function to calculate returns when your cash flows (investments or redemption) are spread over a period of time. Whether you are investing in SIP or lump sum or redeeming through SWP, XIRR will take care of your investment concerns by letting you calculate a consolidated return taking into account the timings of your investments and withdrawals.You can also calculate XIRR using the Microsoft Excel Sheet that has an inbuilt function for calculating the annual yield for scheduled cash flows occurring at irregular time periods. The XIRR formula for excel is Value, Dates, Guess. To use the formula on the excel sheet, follow the below steps:

• In the excel sheet, make two columns. One for dates and the other for transactions. Make sure the dates are mentioned on the left and amounts are mentioned on the right.
• In column A,enter the transaction dates.
• In column B, enter the cash outflows, including investments and acquisitions marked as negative, while inflows such as redemption will be marked as positive as you receive the amount.
• The last row should have the current value of the portfolio and the current date.
• Now insert the XIRR formula in a new cell and select values first, then the dates.
• You can skip the Guess parameter.
• Enter the formula =XIRR (dates, values, guess) and multiply the answer by 100 to know the actual return.

Below is the table that shows the cashflow of an investor for the year 2017:

As observed in the above example, assuming that the SIP investment figure is Rs.5000, marked as negative as it is a cash outflow, while the redemption amount,i.e. Rs.31,000, is entered in positive as it is a cash inflow. In the cell below the the redemption amount, you need to type the formula “=XIRR (B2: B8, A2: A8)*100”and hit enter. The XIRR value you get is 12.66%.

When it comes to calculating mutual fund returns, you may also have come across terms like CAGR or Compound Annual Growth Rate.The most common misconception is that XIRR and CAGR are the same. However, there are differences between the two.Every mutual fund scheme comes with different maturity periods, such as 3 years, 5 years, etc., and the CAGR metric is typically used to know the compounded growth rate of a mutual fund. The Compound Annual Growth Rate in mutual funds helps you to gauge the average growth of your investment for a specific period assuming that the investments are compounded over time.For instance, 3-year returns of 12 % for a mutual fund X will mean that Rs.10,000 invested exactly 3 years ago have now become Rs.14,049.28.The CAGR formula is as follows:CAGR = ((ending amount / beginning amount)^(1/no. of years))-1Below are points that suggest the difference between the XIRR and CAGR:

• CAGR estimates the annual investment return for an individual. While CAGR estimated the annualized and absolute returns for different mutual fund schemes.
• XIRR is measured using multiple cash flows. In contrast, CAGR is usually used for lump sum investments.
• Under XIRR, irregular cash flows are taken into account. On the other hand, CAGR considers only initial value, end value and investment duration.

Calculating XIRR in mutual funds will help you get a clear idea of how much investment returns you are earning and maybe fast-track your financial goals. Having the right methods and tool, it always drives your ability to think logically. So whenever you invest in a mutual fund, ensure how much return you will derive for the investments spread over a period of time.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.