What is XIRR? Meaning, Full Form and Formula

Interest rates are crucial in finance, influencing everything from personal loans to large-scale investments. They represent the cost of borrowing money or the return on invested funds. Understanding how returns are calculated is essential when investing in financial instruments such as mutual funds, fixed deposits, or stocks. 

Traditional interest rate concepts like simple and compound interest help determine growth, but more advanced metrics are needed when cash flows are irregular. Understanding XIRR becomes essential in this case.

What is XIRR? 

XIRR (Extended Internal Rate of Return) is a financial metric used to calculate the annualized return of an investment involving multiple cash flows occurring at irregular intervals. 

Unlike the standard Internal Rate of Return (IRR), which assumes periodic cash flows, XIRR offers a more precise measure of when investments and withdrawals happen at different times. It is widely used in mutual funds, systematic investment plans (SIPs), and stock market advisory services to evaluate portfolio performance.

What is XIRR’s full form?

The full form of XIRR is the Extended Internal Rate of Return. This term reflects its function of extending the IRR calculation to accommodate irregular cash flow intervals.

The formula for Calculating XIRR

XIRR is calculated using this formula:

Where

• di is the last payment date.
• d1 is the 0th payment date.
• Pi is the last payment.
  

However, spreadsheet programs like Microsoft Excel offer a built-in function to compute XIRR. The syntax for the XIRR function in Excel is:

=XIRR(values, dates, guess)

Where

• values: An array of cash flows corresponding to the investment dates. Cash outflows (investments) are negative numbers, while cash inflows (returns) are positive.
• Dates: An array of dates corresponding to each cash flow.
• Guess (optional): An initial guess for the rate of return. If omitted, Excel uses a default value.
  Note: In Excel, the “guess” argument is an optional input that provides a starting point for certain functions. The “guess” argument can be used to improve the accuracy of the result or to find a different result if there are multiple possible answers. 

It’s important to note that the XIRR function calculates the rate of return for a series of cash flows that are not necessarily periodic. The IRR function is used instead to calculate the internal rate of return for a series of periodic cash flows. 

Know More:  SEBI Registered investment advisory |  Stock investment advisory

Step-by-Step Guide to Knowing What is XIRR Calculation in Excel

1. Input Your Data:

   – In one column, list all the dates of your transactions.

   – In the adjacent column, enter the corresponding cash flows. Use negative values for investments (cash outflows) and positive values for returns (cash inflows).

2. Apply the XIRR Function:

   – Select a cell where you want the XIRR result to appear.

   – Enter the formula:

    =XIRR(values, dates)

Replace “values” with the range of cells containing your cash flows and “dates” with the range of cells containing the corresponding dates.

3. Interpret the Result:

The result will be a decimal number. Click the percentage icon at the top taskbar to convert it to a percentage. This percentage represents the annualized return of your investment.

Example

You invested ₹5,00,000 and are receiving returns per the specified dates yearly per the table shared below. Let’s figure out what is XIRR of your investment:

Investment & Returns	Date	Cash flow
Stocks Purchased	27-May-19	-5,00,000
1st share of returns	16-Nov-20	1,00,000
2nd share of returns	18-Aug-21	1,50,000
3rd share of returns	30-Apr-22	2,00,000
4th share of returns	10-Oct-23	3,00,000

In Excel:

– In Column B:
Enter the dates (27-May-2019, 16-Nov-2020, 18 Aug-Jul-2021, 30-Apr-2022, 10-Oct-2023).

– In Column C:
Enter the cash flows (-5,00,000, 1,00,000, 1,50,000, 2,00,000 and 3,00,000).

Then, to find out what is XIRR of your investment, use the following formula:

=XIRR(values, dates)

In this example, it will be
=XIRR (C2:B6, E1:E5)
= 13.98%

This will yield the XIRR value in decimals, which can be easily converted into percentages representing the annualized return of your investment.

Understanding the Result

The XIRR value you obtain represents the annualized effective compounded return rate, considering the exact dates of your cash flows. This provides a more accurate measure of your investment’s performance compared to more straightforward metrics that don’t account for the timing of cash flows.

What is a Good XIRR?

A good XIRR varies depending on the type of investment and market conditions. An XIRR of 12-15% is considered reasonable for equity investments, while an XIRR of 7-10% is common for debt-based investments. However, XIRR alone does not determine an investment’s success—it must be analyzed alongside risk factors, time horizon, and market conditions.

XIRR vs. CAGR

While both XIRR and CAGR (Compound Annual Growth Rate) are used to measure investment returns, they differ in their applications:

• CAGR: Assumes a single investment and calculates a smoothed annual growth rate over a specified period. It suits scenarios with a lump-sum investment and no intermediate cash flows.
• XIRR: Accounts for multiple cash flows occurring irregularly, providing a more accurate return measure for investments like SIPs or those with varying contribution amounts and timings.

CAGR Meaning and Formula
CAGR measures the smooth annualized return of an investment over a specific period. So, if you are wondering how to calculate CAGR, here’s the formula: 

CAGR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] – 1

CAGR assumes a single investment and calculates a consistent annual growth rate, making it useful for lump-sum investments but unsuitable for investments with irregular cash flows.

Key Differences: What is XIRR, and What is CAGR

Feature	XIRR	CAGR
Cash flow type	Irregular	Fixed
Best used for	SIPs, Irregular investments	Lump-sum Investments
Accuracy for Real-World Investments	High	Moderate

What is a CAGR Calculator, and How Does It Work?

A CAGR calculator is an online tool that computes the compound annual growth rate based on initial investment, final value, and duration. It simplifies manual calculations and helps investors compare different investment options effectively.

Conclusion

Understanding “What is XIRR” is crucial for accurately assessing the performance of investments with irregular cash flows. By utilizing the XIRR function in Excel, investors can gain a clearer picture of their annualized returns, leading to more informed financial decisions.

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