What is XIRR in mutual fund, How to calculate XIRR in Mutual Fund and why it is important to look at it ?
The simplest form of Mutual Fund investments includes two transactions a buy and a sell so there are two cash flows namely cash outflow (investment) and cash inflow (redemption). However, this is usually in theory. In real life, we invest and redeem multiple times and in multiple schemes so there are multiple cash flows like Lumpsum Investment, SIP, SWP, additional purchases, dividends, partial redemption, reinvestments etc. Finding returns in such a scenario can be difficult. This is where XIRR comes to our rescue. XIRR basically stands for extended internal rate of return. It is used to calculate returns on investments where there are multiple transactions happening at different times. XIRR is a modification over IRR (internal rate of return). IRR is useful when cash flows happen at regular intervals.
In the functions feature of Microsoft Excel there is an inbuilt function to calculate XIRR.
The XIRR formula in excel is:
=XIRR (value, dates, guess)
It is important to look at not just your Mutual Fund investment XIRR but also portfolio wide XIRR so that you know what is the actual return on your entire investment portfolio. XIRR can be compared with Bank Fixed Deposit Interest rate to check whether your portfolio is doing better than a FD.
If you find it confusing to calculate your portfolio returns don’t worry at Wealth Baba our software calculates the XIRR return for your entire wealth portfolio automatically on a daily basis so you can monitor your investments more closely. Also, if you require any assistance feel free to get in touch with us.