What is XIRR?
XIRR (Extended Internal Rate of Return) is a method used to calculate the annualized return of a series of cash flows that occur at irregular intervals. It is particularly useful for investments like SIPs where contributions are made periodically but not necessarily at regular intervals.
Formula Used
XIRR doesn't have a simple closed-form formula. It is computed using iterative numerical methods (like Newton-Raphson), solving:
∑(CashFlow_i / (1 + XIRR)^( (Date_i - Date_0) / 365 )) = 0
Where CashFlow_i is each transaction (positive for withdrawals, negative for investments) and Date_i is the date of that cash flow.
Example
Suppose you invest Rs. 10,000 on Jan 1, 2023, another Rs. 10,000 on Mar 1, 2023, and receive Rs. 22,500 on Jan 1, 2024. The XIRR would be calculated based on the exact dates and cash flows, and the result might show something like 15.5% annualized return.
Benefits
- Handles irregular cash flows accurately
- Gives a better picture of actual annualized return
- Preferred by mutual fund investors and financial analysts
Frequently Asked Questions (FAQs)
Is XIRR better than CAGR?
Yes, when dealing with multiple transactions on different dates. CAGR is suitable for single-lump investments over time.
Does Excel support XIRR?
Yes. Excel provides an
=XIRR(values, dates)
function to compute it directly.
Can XIRR be negative?
Yes. If your returns are below your investment amount, XIRR can be negative.