XIRR
Extended Internal Rate of Return (XIRR) is the annualized rate of return on a series of cash flows that occur at irregular time intervals. It is the standard way to measure the actual return on a Systematic Investment Plan (SIP), ULIP, or any investment with multiple buy/sell dates.
Understanding XIRR
When you do a 12-month ₹10,000 SIP at ₹10,000 each month and end the year with a ₹1.3 lakh portfolio, the simple return looks like ₹10,000 (8.3%) — but the XIRR could be 15–18% because each installment was invested for a different duration. XIRR weights each cash flow by its actual time in the market.
The mathematical definition is the discount rate that makes the net present value of all cash flows equal to zero — but you almost never compute it by hand. Spreadsheet functions (=XIRR(values, dates) in Excel) handle the iteration.
Why it matters
For investors with SIPs, ULIPs, recurring deposits, or any product with periodic contributions, XIRR is the only honest return metric. CAGR understates SIP returns; total return percentages overstate them. When comparing two funds or two strategies, always compare XIRR — and ignore the marketing CAGR numbers that assume lump-sum investing.
Example
You invest ₹10,000 monthly for 12 months in a mutual fund. Total invested: ₹1.2 lakh. End-of-year portfolio value: ₹1.32 lakh. The naive return looks like 10%, but XIRR reveals the actual annualized rate is approximately 18% — because the first installment was invested for nearly 12 months, but the last one for only one month. The fund actually performed at a 18% annual rate.
You invest ₹10,000 monthly for 12 months in a mutual fund. Total invested: ₹1.2 lakh. End-of-year portfolio value: ₹1.32 lakh. The naive return looks like 10%, but XIRR reveals the actual annualized rate is approximately 18% — because the first installment was invested for nearly 12 months, but the last one for only one month. The fund actually performed at a 18% annual rate.