If you invest in mutual funds through a systematic investment plan (SIP), you’re probably familiar with the concept of CAGR, or compound annual growth rate. CAGR is a good measure of how much your investment has grown over time, but it’s not always the most accurate way to track your returns if you’ve made multiple investments at different times.
In this blog post, we’ll explain what XIRR is and why it’s important for mutual fund investors. We’ll also show you how to calculate XIRR for your own investments.
What Is XIRR?
XIRR is a way to measure how much your investment has grown over time, taking into account the timing of your investments. It’s especially useful for SIP investors, who typically make regular investments over a period of time.
Imagine you invest ₹5,000 per month in an SIP for three years. If the NAV of the fund increases by 10% per year, your CAGR would be 10%. But if you invest ₹5,000 at the beginning of each month, your XIRR would be higher than 10%. This is because you’re buying more units when the NAV is lower and fewer units when the NAV is higher.
Good XIRR in Mutual Fund
Investors often view an XIRR greater than 12% as a favorable outcome for equity mutual funds, while for debt mutual funds, an XIRR above 7.5% is commonly perceived as a noteworthy achievement.
How to Calculate XIRR in Mutual Funds
For XIRR calculation, I definitely suggest calculating it in Microsoft Excel. It is a very convenient and handy tool because of its xirr function in microsoft excel.
Use this formula in excle XIRR (value, dates, guess).
XIRR Examples
your sip amount is around ₹ 10000 with investment date between start-11/01/2020, end-21/08/2022.
Redemption date 21/09/2022
so that this is your cash flows are occurring at irregular intervals.
| Transaction Date | Cash Flow (₹) |
|---|---|
| 11-01-2020 | -10000 |
| 03-02-2020 | -10000 |
| 01-03-2020 | -10000 |
| … (various dates) | -10000 |
| 21-08-2022 | -10000 |
| 21-09-2022 | 100000 |
here’s how i did XIRR for this SIP in Microsoft Excel.
- In column A, enter the transaction dates on the left side, starting from 11-01-2020 to 21-09-2022.
- In column B, enter the SIP figure of ₹10,000 as a negative figure for each investment transaction.
- Against the redemption date (21-09-2022), enter the redemption amount of ₹100,000 in Column B.
- In a cell below the cash flows (e.g., Bxx), type the formula
=XIRR(B1:Bxx, A1:Axx)*100and press Enter. - Excel will display the XIRR value as a percentage, which represents the annualized rate of return for your SIP investment over the given period.
Conclusion
I hope this article on XIRR in mutual funds with a calculation process in Excel helps you. If you have any questions or need further support, please feel free to comment below.
FAQs
Can XIRR Be Negative
Yes, XIRR (Extended Internal Rate of Return) can be negative. In fact, a negative XIRR is often an indicator that the investment has not performed well or has resulted in a loss.
Why is XIRR Higher Than IRR
XIRR can be higher than IRR because it takes into account the timing of cash flows, while IRR does not. This means that XIRR can be more accurate for investments with irregular cash flows, such as mutual funds with irregular SIP schedules.
XIRR or absolute return
Whether you should look at XIRR or absolute return depends on your investment goals and time horizon.