When you invest in mutual funds, especially through SIPs (Systematic Investment Plans), understanding your real returns is extremely important. Many investors look at absolute returns or CAGR, but these numbers often fail to show the true picture when investments are made at different times. This is where XIRR becomes a powerful and reliable metric.
In this article, we will explain what is XIRR in mutual fund, how it works, why it is important, and how it differs from other return calculations—all in simple language.
What Is XIRR in Mutual Fund?
XIRR stands for Extended Internal Rate of Return. In mutual funds, XIRR is used to calculate the annualized return of investments where money is invested or withdrawn on multiple dates.
Unlike lump-sum investments, SIPs involve investing small amounts regularly—monthly, quarterly, or irregularly. Since each investment happens at a different time, calculating returns using simple formulas becomes inaccurate. XIRR solves this problem by considering both the amount and the timing of every cash flow.
In simple words, XIRR tells you the actual yearly return you are earning on your mutual fund investments, considering all inflows and outflows.
Why Is XIRR Important in Mutual Funds?
XIRR is especially important for investors who invest through SIPs or make multiple purchases and redemptions. Here’s why it matters:
Accurate Performance Measurement
XIRR gives a realistic picture of how your investment is performing annually.
Best for SIP Investments
Since SIPs involve periodic investments, XIRR is the most accurate way to measure returns.
Helps Compare Investments
XIRR allows you to compare returns across different mutual funds or even other assets like FD, stocks, or real estate.
Considers Time Value of Money
Money invested earlier has more growth potential than money invested later. XIRR accounts for this difference.
How Does XIRR Work?
XIRR works by calculating the rate at which the present value of all investments equals the present value of all withdrawals and the current value of the investment.
Each investment is treated as a negative cash flow (money going out), and the final value or redemption is treated as a positive cash flow (money coming in).
For example:
- Monthly SIP investments → negative cash flows
- Current portfolio value or redemption → positive cash flow
The XIRR formula then computes a single annual return rate that balances all these cash flows over time.
Example to Understand XIRR Better
Suppose you invest ₹5,000 every month in a mutual fund SIP for one year.
- Total investment: ₹60,000
- Current value after one year: ₹66,500
Your absolute return is ₹6,500, but this does not show your annual growth rate accurately.
When you calculate XIRR, considering the exact date of each monthly investment, you may find that your XIRR is around 13–14%, which reflects your true annual return.
This number is much more meaningful than absolute return.
XIRR vs CAGR: What’s the Difference?
Many investors confuse XIRR with CAGR. While both measure annual returns, they are used in different situations.
| Feature | XIRR | CAGR |
|---|---|---|
| Used for | Multiple investments (SIP) | Lump-sum investment |
| Considers cash flow dates | Yes | No |
| Accuracy for SIP | Very high | Not suitable |
| Time value of money | Yes | Yes |
CAGR works best when you invest once and withdraw once.
XIRR is ideal when there are multiple investments or withdrawals.
How to Calculate XIRR in Mutual Funds?
1. Using Excel or Google Sheets
You can calculate XIRR using the built-in XIRR function.
Steps:
- List all investment dates and amounts
- Enter investments as negative values
- Enter current value or redemption as positive value
- Use formula:
=XIRR(values, dates)
2. Using Mutual Fund Apps
Most mutual fund platforms and apps like Groww, Zerodha Coin, Paytm Money, and others automatically show XIRR for your portfolio.
3. Using Online Calculators
Several financial websites offer free XIRR calculators where you just enter investment details.
What Is a Good XIRR in Mutual Funds?
A “good” XIRR depends on the type of mutual fund and market conditions:
- Equity Mutual Funds: 12%–15% long term is considered good
- Hybrid Funds: 9%–12%
- Debt Funds: 6%–8%
Over the long term, an XIRR consistently above inflation and fixed deposit rates indicates healthy investment performance.
Limitations of XIRR
While XIRR is extremely useful, it has some limitations:
1. Market Volatility Impact
Short-term XIRR can fluctuate due to market ups and downs.
2. Not Ideal for Very Short Periods
XIRR over a few months may appear unusually high or low.
3. Assumes Reinvestment
XIRR assumes that interim cash flows are reinvested at the same rate, which may not always be true.
Despite these limitations, XIRR remains the most accurate return metric for SIP investors.
When Should You Use XIRR?
You should use XIRR when:
- You invest via SIPs
- You make additional lump-sum investments
- You partially redeem investments
- You want to evaluate overall portfolio performance
If you invest regularly, XIRR is the right metric—not absolute return or CAGR.
Final Thoughts
Understanding what is XIRR in mutual fund can significantly improve how you track and evaluate your investments. It gives a clear, realistic, and annualized view of your returns by accounting for the timing and amount of every investment.
For SIP investors, XIRR is not just a number—it is the most reliable indicator of true investment performance. By regularly tracking your portfolio’s XIRR, you can make smarter financial decisions, compare funds effectively, and stay focused on long-term wealth creation.