XIRR stands for Extended Internal Rate of Return. It is a method used to calculate the actual annual return earned on mutual fund investments when money is invested or withdrawn on different dates. It is especially useful for SIP investments, where you invest every month instead of one lump sum.
You invest ₹5,000 every month in a mutual fund through SIP. In SIP, every installment is invested on a different date. So normal return calculation is not accurate. XIRR considers the date of each investment and gives a better result.
Mutual Funds offer 40%, 50% return but why XIRR shows only 10% return? What is the Real Return?
The real return for you should be considered as XIRR. XIRR is the most accurate and real return.
The 50% or 40% return shown in mutual funds usually represents the overall performance of the fund over a certain period, such as 1 year, 3 years, or since launch.
However, XIRR is different because it shows your actual personal return based on when and how you invested your money. It is mainly useful for SIP investors, where money is invested on different dates every month. In simple words, the return shown by the mutual fund is the fund’s performance, while XIRR is your own real return from that fund.
So, you should not be swayed by 40% or 50% returns; check the real XIRR to find the actual return.
In the image above, you can see that the 1-year return of mutual funds is very high, but the actual XIRR is much less than the return shown. Now, let’s understand more clearly.
The image above shows a person’s mutual fund portfolio. The returns are 16.75%, but the actual XIRR is 8.42%. This means that the person got actual returns of only 8.42%. So, XIRR is the real return that you get on investment in mutual funds.
