What is XIRR in Mutual Funds: Meaning, Calculation & Formula

We generally invest small amounts of money in mutual fund schemes through systematic investment plans or SIPs. The money is allocated over time on regular basis in mutual fund schemes. Generally, an investor may redeem his investments say after when 5, 10, or 15 years have passed by. Most of us may want to determine how much returns we have earned over the initial investment amount. It is important therefore to accurately calculate our gains.

What is XIRR meaning in mutual fund?

XIRR means Extended Internal Rate of Return. One of the most widely used methods to determine the actual return on an investment is calculating the XIRR, which represents the present value of the total investment made when applied to each SIP instalment.

What is XIRR in SIP?

Essentially it allows for finding out the gains made from investments which may involve different amounts of transactions at distinct points of time such as SIPs which is generally done multiple times during a year. Consequently, returns on mutual fund scheme SIP are typically assessed using XIRR.

What is the XIRR formula?

XIRR is commonly calculated on Microsoft Excel, which has a built in mechanism to compute the returns. XIRR is an advanced Excel function that enables the calculation of the annualized yield for a series of cash flows happening at even irregular intervals. To utilize the XIRR formula in Excel, you can use the syntax: = XIRR (value, dates, and guess).

Steps to calculate XIRR on Microsoft Excel

1. Basically, first one needs to consolidate all your purchases into a single column.
2. Identify outflows, such as investments and acquisitions, as market negative, and mark inflows, like redemptions, as market positive.
3.  In the adjacent column, include the transaction's corresponding date. Record the current value of your holdings and the date in the final row.
4. In Excel, utilize the XIRR function with the following format: =XIRR (values, date, Guess).
5. Choose values that represent a series of cash flows aligned with a payment schedule based on specific dates.
6. The date column should indicate when the initial investment was made and when the cash flows were received. The Guess parameter is optional; if no value is provided, Excel assumes a default of 0.1.

Conclusion:

XIRR is one of the invaluable tool for calculating real-world investment returns specifically in case of Investing in Mutual Funds which may/may not be evenly distributed and may vary at multiple points in time. For informed investment selections, one can seek the advice of financial professionals or go online for market and fund updates.

FAQs

How does XIRR account for different cash flows and time periods?

XIRR allows you to allocate precise dates to each separate cash flow, which helps enhance the accuracy of the calculation significantly.

Does XIRR assume daily compounding?

Yes, XIRR computes the actual rate of return on investments with daily compounding

How do I interpret the XIRR value for my investments?

XIRR computes one particular rate of return by taking into account each payment done over the investment tenure.

 

Disclaimer:

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Investors may consult their financial advisors and/or tax advisors before making any investment decisions. The Blog intends to highlight a methodology which can be considered by investors for the purpose of calculating the performance of their investments. This and its outcome solely should not be used and relied upon for making any investment decisions. Kotak Mahindra Asset Management Company Limited/ Kotak Mutual Fund makes no warranty about the accuracy of the functionality.

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