What is XIRR, IRR and CAGR : How to calculate Returns on Mutual funds

(Last Updated On: July 6, 2017)

If you are an investor with Bodhik and you go to your dashboard you will see returns on your mutual fund investments. The returns are expressed in terms of XIRR. With mutual funds we hear about various terms like XIRR< IRR and CAGR and wonder what is XIRR, IRR or CAGR ? In this post, we have a look at what is XIRR and how XIRR can be used to calculate returns on mutual funds.

Bodhik dashboard is very simple It shows you how much you invested, what is the current value of the investment and what is the return. I have shown a sample screenshot below

 

One of the  Frequently asked question from our investors is how do you calculate this return. So I thought let me write this post to explain to them how the return is calculated and also look at alternate ways of calculating mutual fund returns

What is XIRR

XIRR stands for Extended Internal Rate of Return is a method used to calculate returns on investments where there are multiple transactions happening at different times. It is a variant of IRR and takes care of use cases when your cash flowsz are not periodic.

Why does XIRR Make sense for mutual fund investments

XIRR is a good function to calculate returns when your cash flows ( investments or redemption) are spread over a period of time. In the case of Mutual funds, if you are investing using SIP or lump-sum or redeeming through SWP or lump sum, XIRR can take care of all those scenarios and helps you calculate a consolidated return considering timings of your investment and withdrawals.

READ  What are Index Funds: meaning, advantages, review, Taxation

How to calculate XIRR

XIRR can be easily calculated using Excel. Excel provides an inbuilt function to calculate XIRR. Here is a step by step process to calculate XIRR

  1. Enter all your transactions in one column. All outflows like investments, purchases will be market negative while all inflows like redemption’s while be marked positive
  2. In the next column add the corresponding date of the transaction
  3. In the last row mention the current value of your holding and the current date
  4. Now Use XIRR function in excel  which is something like this  XIRR (values, date, Guess), select values and date columns, Guess parameter is optional ( if you do not put any value Excel use a value of 0.1)

Here is a simple video which explains XIRR calculations

Calculating XIRR for Geeks

So if you are geek and want to understand XIRR more in detail read this small note from Microsoft or this small read up

Difference between IRR and XIRR

Next question I frequently get asked is why use XIRR, why not IRR well IRR can be used for the majority of investments only place where XIRR can be more useful is when your transactions are not equally spaced in time. If your transactions are equally spaced.

How to calculate IRR

Here is a simple video which explains how to calculate IRR

Can we use CAGR instead of XIRR

The typical metric that is used in returns of investment is CAGR ( you will see) lot of mutual funds quoting their returns in CAGR, can we use CAGR for calculating our returns while it is easy to calculate CAGR for a fund but for personal investments it becomes a little tricky.

READ  Large cap vs Mid cap vs Small cap funds : Difference, Review and Performance

Let’s say you make monthly SIP  of 10000 for 3 years so you have invested in 36 instalments and at the end of 3 years your portfolio value is 400000. At the end of the 36 months if you want to calculate your portfolio return you will have to calculate CAGR for 35 months, 34 months, 33 months for different investments you made and hence quite complicated.

XIRR makes this simpler by calculating it iteratively one return for your investments.

So if you are looking to calculate returns on your mutual fund investments XIRR might be the right way to go, that is the reason we use XIRR in bodhik dashboard.

If you have any questions please feel free to ask in comments section

Post A Reply