Many investors will ask, “how much return will I get?” There are multiple ways to define what a return is; some common definitions are absolute return, compounded annual growth rate (CAGR), and extended internal rate of return (XIRR), as shown in this example.
If you invest through SIP (Systematic Investment Plan), then one of the most important returns to think about is XIRR.
In this guide, we will explain what XIRR means in mutual funds as well as its purpose, the reasons why XIRR is essential, and the ways you can use it to evaluate your investments.
What Is XIRR in Mutual Fund?
XIRR stands for Extended Internal Rate of Return.
In mutual funds, XIRR is used to calculate the annualized return when investments are made on different dates and in different amounts. This is why XIRR is mainly used for SIP investments.
Since SIP investments happen every month, each installment stays invested for a different time period. XIRR considers:
- The amount invested
- The date of each investment
- The current or final value
- The exact time each amount stayed invested
Because of this, XIRR gives a real and accurate picture of your mutual fund returns.
Why XIRR Is Important for SIP Investors
Most mutual fund investors invest through SIP. In SIP:
- Money is invested monthly
- Market NAV changes every month
- Each SIP installment grows for a different duration
Using simple return or CAGR for SIP can give wrong or misleading results.
XIRR solves this problem by calculating returns based on actual cash flow and time. That is why XIRR is the best return measure for SIP investments.
Simple Example to Understand XIRR
Let’s understand XIRR with an easy example.
You invest ₹10,000 every month for 1 year.
Total investment: ₹1,20,000
Current value after 1 year: ₹1,35,000
Because each ₹10,000 was invested at a different time, the return cannot be calculated using CAGR.
XIRR calculates how much return each installment earned based on how long it stayed invested and then shows one annual return number.
Your XIRR may come around 14–16%, depending on market movement.
How XIRR Works in Mutual Funds
XIRR works on the concept of cash flow timing.
In mutual funds:
- Each SIP installment is treated as a cash outflow
- The final or current value is treated as cash inflow
- Dates are very important
XIRR calculates the return rate at which the present value of all investments equals the present value of returns.
This makes XIRR more accurate than other methods for long-term SIP investors.
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Difference Between XIRR and CAGR
Many investors confuse XIRR with CAGR. Here is a simple comparison:
| Feature | XIRR | CAGR |
|---|---|---|
| Best for SIP | Yes | No |
| Multiple investment dates | Yes | No |
| Used for lump sum | Yes | Yes |
| Accuracy for SIP | High | Low |
| Considers timing | Yes | No |
In short:
- Use CAGR for lump sum investments
- Use XIRR for SIP investments
Is XIRR Applicable for Lump Sum Investment?
Yes, XIRR can also be used for lump sum investments.
If you invest once and redeem once, XIRR and CAGR will give almost the same result.
However, XIRR becomes truly useful when:
- You invest multiple times
- You invest through SIP
- You add or withdraw money in between
How to Check XIRR of Mutual Fund Investment
You can easily check XIRR using different platforms.
Ways to Check XIRR:
- Mutual fund apps
- AMC websites
- Portfolio tracking apps
- Excel using the XIRR formula
Most modern mutual fund apps automatically show XIRR for SIP investments, so you don’t need to calculate it manually.
Higher XIRR = More Profit
A higher XIRR indicates a higher rate of return but is not the only thing you should look at when making an investment decision.
You should also consider the following:
- Length of time you have held the investment
- Current market conditions
- How much risk you are willing to take with your investment
- The consistency of returns over the period you are invested
You should not assume that a high XIRR during a short period of time automatically indicates that it will be a good investment for a long period of time.
Investors Often Make These Mistakes When It Comes To XIRR
Most investors do not understand XIRR. Some common errors investors make include:
- Comparing the XIRR of two different investments that were held for different lengths of time
- Assuming XIRR will stay the same over time
- Reacting emotionally when XIRR declines during times of market corrections
- Directly comparing XIRR of a systematic investment plan (SIP) to an interest-bearing fixed deposit (FD) account
XIRR is based on the daily movement of net asset value (NAV) and should not be looked at on a day-to-day basis, but rather over longer periods.
XIRR And Long Term Wealth Creation
XIRR will be useful to long-term investors in helping them to:
- Monitor the true performance of their SIP
- Make accurate comparisons between various mutual funds
- Determine the efficiency of their investment
- Make educated decisions
Even small differences between two different XIRRs, when viewed over a period of 10–20 years, can result in large differences in wealth.
Final Thoughts
XIRR is one of the most important concepts every mutual fund SIP investor should understand.
It shows the real annual return of your SIP investment, considering timing and cash flow. If you invest regularly, XIRR gives a true picture of how well your money is growing.
Instead of focusing only on short-term returns, investors should look at XIRR over longer periods and stay disciplined with their SIPs.
Understanding XIRR can help you become a smarter and more confident mutual fund investor.
Q&A
XIRR – Common Questions and Answers
Q1. What does XIRR mean in mutual funds?
XIRR means Extended Internal Rate of Return. It is used to calculate the annualized return of a mutual fund investment when money is invested at different times and in different amounts, such as in SIPs. XIRR shows the real return of your investment by considering both time and cash flow.
Q2. XIRR vs Absolute Return – What is the difference?
Absolute return shows the total gain or loss on your investment without considering time. XIRR, on the other hand, shows the yearly return considering when and how much money was invested.
- Absolute return is simple but less accurate for SIPs
- XIRR is more accurate for SIP and multiple investments
For long-term or SIP investors, XIRR is always better than absolute return.
Q3. What is the difference between CAGR and XIRR?
CAGR is used when you invest a lump sum once and stay invested for a fixed period. XIRR is used when investments happen multiple times, like monthly SIPs.
- CAGR assumes one-time investment
- XIRR considers multiple investments and dates
- XIRR is more accurate for SIP investors
In short, use CAGR for lump sum and XIRR for SIP.
Q4. What is XIRR and how is it calculated?
XIRR calculates returns by considering cash inflows, cash outflows, and dates of each transaction.
In mutual funds:
- Each SIP installment is treated as money going out
- The current value or redemption is treated as money coming in
- The exact dates are used for calculation
The calculation is done using a mathematical formula (or Excel’s XIRR function), but most mutual fund apps calculate it automatically for you.
Q5. What is a good XIRR for mutual fund investments?
A good XIRR depends on the type of fund and market conditions.
- Equity mutual funds: 12%–15% XIRR is considered good over the long term
- Hybrid funds: 8%–12% XIRR
- Debt funds: 6%–8% XIRR
More important than short-term high XIRR is consistent performance over many years.