What is XIRR? (Extended Internal Rate of Return)
XIRR is a financial metric used to calculate the annualised return on investments where cash flows (investments and withdrawals) occur at irregular intervals — unlike CAGR, which assumes a single lump-sum investment. XIRR is the most accurate way to measure the actual returns of a SIP portfolio.
For example, if you invested ₹10,000 per month via SIP for 3 years and received ₹4.5 lakh at the end, XIRR tells you the equivalent annualised return of that investment — which a simple CAGR calculation cannot.
How XIRR is Calculated
XIRR finds the rate r such that:
Σ [ Cash Flow_i / (1 + r)^(d_i / 365) ] = 0
Where:
Cash Flow_i = Each investment (negative) or withdrawal (positive)
d_i = Number of days from the first cash flow date
r = XIRR (annualised return rate)
This is solved iteratively using Newton-Raphson method.
When to Use XIRR
- SIP Portfolios: For calculating actual returns on monthly SIP investments.
- Irregular Investments: When you invest different amounts at different times.
- Portfolio Review: To compare your portfolio's real return against benchmark indices.
- Redemptions: To account for partial withdrawals at different points.
XIRR vs CAGR
- CAGR is for single, lump-sum investments; XIRR is for multiple, irregular cash flows.
- XIRR is always more accurate than CAGR when evaluating SIP or staggered investments.
- Mutual fund statements use XIRR to show your portfolio's annualised return.
