What is XIRR ? Why is it better than CAGR ?
Extended internal rate i.e. XIRR is rate of return for investments where the cashflows are irregular and entail multiple transactions, for example a mutual fund SIP
This method considers each SIP to be an separate investment because the time for which every investment gets invested is different
It is mainly called as internal rate of return because it doesn’t take into consideration other risk factors like the inflation or other risks while calculating the rate of return on investment
The best way you can derive XIRR is by using excel formulas
How?
Formula =XIRR(B1:B13,A1:A13)
In Transaction column add date on which the SIP was credited in Mutual Fund account
and in next column add the amount that was credited – put a minus sign in front of every amount that was credited into the account in the last row add the total amount that was credited into the account with no +/- sign before it – now use the above formula and you will easily get the required XIRR for a given period
For Example
| Transaction Date | Amount | ||
| Jan-2024 | -5000 | ||
| Feb-2024 | -5000 | ||
| March -2024 | -5000 | ||
| April-2024 | 0 | ||
| May-2024 | 0 | ||
| June-2024 | 0 | ||
| July-2024 | -5000 | ||
| August-2024 | -3000 | ||
| September-2024 | -3000 | ||
| October-2024 | -3000 | ||
| November -2024 | -3000 | ||
| December -2024 | -3000 | ||
| January -2025 | 50000 | ||
| XIRR | 34% | ||
CAGR is another metric that is used to calculate mutual fund return – but it takes into account lumpsum investment and a fixed time period, hence XIRR proves to be a better measure when it comes to calculating annualised rate of return for irregular cash flows that entail in a mutual fund
Making Money is a SKILL – Maintaining Money is a DISCIPLINE- Multiplying Money is a ART
