Mutual funds (MF) are among the most popular investments for seasoned and novice investors alike. They pool funds from multiple inventors and invest in various bonds, stocks, and other securities. They are also professionally managed, providing safe and regular returns. Due to their diversification, they also face fewer risks than other investments.
Those who invest in mutual funds can use XIRR to determine their personal rates of return. This article explores the meaning of XIRR in mutual funds, why it is used, and how to calculate it.
The Extended Internal Rate of Return’s (XIRR), meaning in mutual funds, is the rate of return that provides investors with the current value of their total investment. It is the total actual returns on your investments.
It is important to know what is XIRR in mutual funds to assess your returns and adjust your investment plans accordingly. .
Usually, the Compound Annual Growth Rate (CAGR) is used to find the returns from mutual fund investments. This method is best suited for calculating systemic returns. However, not all investments are systemic or regular, like those in a Systemic Investment Plan (SIP).
For example, an investor may choose to invest for 11 months, not make payments for 4 months, and then resume them again. An investor may choose to redeem some parts of their investment or change the investment amount occasionally. To calculate returns for these dynamic investments, you must find what is the XIRR in SIP.
| Criteria | CAGR | XIRR |
| Type of return | It is the absolute annualised return. | XIRR means the average annualised return. |
| Values considered | CAGR considers the investment tenure, initial, and final value. | XIRR takes into account every cash inflow and outflow. |
| Ideal for | CAGR is ideal for calculating lump-sum investments. | XIRR is ideal for calculating investments that have multiple inflows and outflows, such as SIP. |
Most investors use MS Excel to calculate what is XIRR in MF. Take the following steps to calculate XIRR:
- Column 1: In column 1, enter all the inflows and outflows of your investment. The inflows will be marked as positive values, and the inflows will be marked as negative values.
- Column 2: In column 2, input the dates for all transactions.
- Column 3: In column 3, you will need to input the current value of your holdings and the redemption date.
In the box under the redemption value, enter the XIRR function “=XIRR (values, date, guess)”. This will get you the rate of returns.
After inputting the XIRR function and clicking enter, this amount has to be multiplied by 100 to get the XIRR.
In many mutual funds, investments can be irregularly spaced, and investors may change the value of their investments over time. The meaning of XIRR in mutual funds is the real value of their returns for irregular investment plans.
Do you want to kickstart your mutual fund investments? Tata Capital’s Moneyfy app makes the process easy. We offer a simple onboarding process and diverse funds to choose from to help you reach your financial goals. Download the app today to get started on your investment journey!
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03 January 2025
3 mins read
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