If you are someone who wants to invest in a mutual fund, you might think about how you can calculate the return on your investment. The answer is XIRR. XIRR is used to calculate the annual rate of return while investing in mutual funds through the SIP. This metric helps you calculate a single rate of return earned from all the installments made.

In this article, you’ll get to learn about the meaning and calculation of XIRR in mutual funds. You’ll also get an idea of how XIRR is different from CAGR.

## What is XIRR in Mutual Funds?

Firstly, the XIRR full form is Extended Internal Rate of Return. It is a metric to calculate the rate of return provided by a mutual fund scheme. This formula is ideally used in the SIP (Systematic Investment Plan) mode of mutual funds.

XIRR takes into account different cash outflows paid every month along with the cash inflows. In this method, the annual average return of each SIP installment is calculated which will eventually help in calculating the single annual rate of return from all the installments paid.

## Why is XIRR Important?

XIRR helps you calculate returns from your SIP investment because, over a period of time, the installment amount can differ because of changing NAVs. Also, you can use this formula when the date of installment changes every time.

This measure can be used to compare the returns of a mutual fund with the benchmark index. If X mutual fund has a higher XIRR than the benchmark, the fund has outperformed the benchmark. XIRR can also be used to compare X and Y mutual funds that are from the same category.

## Calculation of XIRR in Mutual Funds

You can calculate the XIRR percentage in mutual funds in Excel. The formula is XIRR (values, dates,[guess]).

Suppose you have invested in X mutual fund through the SIP mode. The installment paid for 7 months is ₹3,000 and redemption is done in 8 months. Here are the steps to calculate XIRR:

- Firstly, enter all the cash outflows in negative terms and cash inflow that can be received at the time of redemption in positive terms in the first column.
- In the second column, enter the installment dates and redemption date.
- After that, select the XIRR formula. Select the first column range in ‘values’ and the second column range in ‘dates’. The ‘guess’ is optional and it will automatically take the value of 0.1.
- Finally, multiply the result by 100 to calculate a rate of return in percentage.

Amount (in ₹) | Date (SIP Installments) |

-3000 | 01-01-2023 |

-3000 | 03-02-2023 |

-3000 | 02-03-2023 |

-3000 | 05-04-2023 |

-3000 | 01-05-2023 |

-3000 | 07-06-2023 |

-3000 | 10-07-2023 |

22000 | 03-08-2023 |

XIRR | 15.02% |

You can also calculate the returns with the help of a free-to-use online SIP calculator by Dhan. You have to enter the monthly investment amount, expected rate of return, and period of investment. The calculator will provide the results of estimated returns and the total wealth that you can earn.

## XIRR Vs CAGR

Here are the key differences between XIRR and CAGR methods:

Key Differences | XIRR (Extended Internal Rate of Return) | CAGR (Compound Annual Growth Rate) |

Suitability | Suitable for investments with irregular cash inflows and outflows. | Useful for investments with regular cash flows for a long period. |

Used For | SIP investment | Lumpsum investment |

Consideration | All cash flows and timings of investment | Only the first outflow, investment period, and final inflow |

Return | Calculate the single annualized return having different cash flows. | Calculate the average annualized return of an investment with consistent cash flows |

## How Much XIRR is Good for Mutual Funds?

XIRR is a measure to calculate the single annualized rate of return from mutual fund SIP. However, there is no exact percentage that can be termed as a good XIRR percentage for investing in mutual funds.

In general, if equity funds have given around 11%-12% XIRR, then it can be a good choice. If debt funds give more than 7.5% XIRR, it can be chosen. But still, you can select a mutual fund according to your investment goals, timeframe choice, and risk profile.

### Conclusion

XIRR in mutual funds means the annual rate of return that you can earn on your irregular installments paid over a period. This method considers all the cash flows and the date of installments. You can use XIRR for SIP whereas CAGR can be used for lumpsum investment.

### FAQs

#### How much XIRR is good for mutual funds?

12% XIRR can be good for equity funds whereas 7.5% can be good for debt funds. However, this is not a universally applicable rule.

#### What does XIRR of 10% mean?

XIRR of 10% means that a mutual fund has given a 10% absolute annualized rate of return in the overall period of investment after taking into account all cash flows.

#### Is XIRR better than CAGR?

XIRR can be a better measure than CAGR when there are irregular cash flows and different time intervals. XIRR is more suitable when you are investing in mutual funds through the SIP method.

#### What does XIRR 99 mean?

XIRR value of 99 means that the mutual fund has given an annualized return of 9900% over the invested period.

📌 You can also read:

- What is NAV in Mutual Funds: Meaning, Calculation, & More!
- What is the Expense Ratio in Mutual Funds?
- What is ELSS Funds: How to Invest in ELSS Funds?

Happy Investing 💰

*Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.*