XIRR (Extended Internal Rate of Return) is an annual (annualized) rate of return, not a monthly one. It calculates the return based on specific, irregular dates for cash flows and assumes a 365-day year to report the yearly yield. It is commonly used for mutual funds (SIPs) and investments with inconsistent cash flows.
The fact that XIRR can generate daily results does not mean it compounds daily; in fact, XIRR compounds annually, but it simply has the ability to provide results based on inputs from any given day. The underlying formula that XIRR utilizes is as follows: (1+R)^(#days/365)-1.
XIRR determines the yearly return rate by calculating the total value of all money invested and the total value of all money withdrawn based on their dates and adjusting the return rate until both sides balance.
XIRR allows cash flows to occur on any date, with values that may vary and represent either income (positive) or expenditure (negative). At least one value must be negative and at least one value must be positive. XIRR assumes that all years (including leap years) comprise 365 days.
In simpler terms, IRR tells you the rate of return an investment is expected to generate over its lifetime. For example, if a project has an IRR of 15%, it means that the project is expected to generate an annual return of 15% on the invested capital, provided that assumptions about cash flows hold .
XIRR stand for Extended Internal Rate of Return, is a refined version of IRR (Internal Rate of Return) that calculates the annualised return of investments with multiple cash flows occurring at irregular intervals.
Difficult to interpret for short-term investments
XIRR can produce misleading or exaggerated results when applied to very short-term investments with limited transactions.
XIRR is that single rate of return, which when applied to every installment (and redemptions if any) would give the current value of the total investment. XIRR is your personal rate of return. It is your actual return on investments.
XIRR Day Count Differences
Notice that the dj in the exponent is the actual number of days, and in all cases XIRR uses a 365-day year. That means XIRR uses an actual/365 day count convention. Note that 2024 is a leap year, so the last cash flow is on day 366.
A good XIRR in mutual funds depends on your goals and investment type. For equity mutual funds, an XIRR above 12–15% over the long term is considered good. Importantly, the XIRR in SIP should exceed the inflation rate to grow real wealth. Always compare it with benchmark returns and your risk tolerance..
How much XIRR to double in 3 years? To double your investment in 3 years, you need an approximate XIRR of 24% per annum as per the Rule of 72. 72 divided by the number of years (72/3 = 24).
The formula for XIRR is: XIRR = (NPV of Cash Flows / Initial Investment) × 100. The ideal XIRR varies based on the type of fund and individual financial goals. For example, a conservative debt fund might target an XIRR of 5–6%, while an aggressive small-cap fund may aim for 12–15%.
"12% interest" means that the interest rate is 12% per year, compounded annually. "12% interest compounded monthly" means that the interest rate is 12% per year (not 12% per month), compounded monthly. Thus the interest rate is 1% (12% / 12 ) per month.
Compared to annual compounding, monthly compounding provides higher returns. This is because interest is added to the principal twelve times a year, helping your funds to grow quicker.
XIRR stands for Extended Internal Rate of Return. In contrast to IRR, the XIRR formula provides you with an extended rate of return that takes into account cash flows and discount rates, as well as the corresponding dates, providing you with a more accurate ROI percentage.
XIRR helps you calculate annualised returns on investments when you have made multiple transactions at different times, particularly for Systematic Investment Plans (SIPs).
The problem? Excel's built-in XIRR function expects the first value in its range to be negative. So, if the first cell (or the first several cells) are zero, XIRR will always return 0.00%, even if cash flows materialize later.
XIRR provides an annualised rate of return that considers the timing and amount of each cash flow. In contrast, absolute return measures the total return without regard to the investment period or cash flow timings.
For example, if inflation is at 2%, an XIRR of 7-9% might be considered satisfactory for a moderate-risk equity fund. However, expectations can vary based on the type of fund. A conservative debt fund might target an XIRR of 5-6%, while an aggressive small-cap fund could aim for 12-15%.
It encompasses four major aspects: time horizon, diversification, emotional discipline, and contribution escalation. These numbers—7, 5, 3, and 1—serve as memorable markers to guide decisions and expectations. The “7” in the rule underscores the importance of holding equity SIP investments for at least seven years.
Absolute Return provides a quick view of profit or loss, ideal for short-term, single investments. XIRR, on the other hand, gives a more accurate and time-adjusted picture of long-term investments with varied cash flows. Together, they help investors assess performance from both a simple and time-sensitive perspective.
The best mutual funds can return 10-12 percent in an average year over time, while in their best years a top mutual fund can return 20 percent or more. Funds that are based on the S&P 500 are among the best long-term performers.
The return value of the XIRR functionality can be positive or negative. In the case of an investment, a negative result indicates that the investment is a loss. The amount of gain or loss can be calculated simply by making a sum aggregation over the payments field.