Glossary Term

XIRR: Meaning & Example

Extended Internal Rate of Return; a metric to calculate return on investments with multiple cash flows.

Detailed Explanation

Extended Internal Rate of Return (XIRR) is a powerful mathematical function used to calculate the annualized yield of an investment where cash is put in and taken out at irregular intervals. While CAGR is great for a single lump-sum investment, it fails completely if you are making monthly SIPs or randomly withdrawing money. XIRR solves this by assigning a specific date to every single cash flow, giving you the true, exact annualized return of a messy, real-world portfolio.

Real-World Example

You invest $1,000 in January, pull out $200 in March, invest $5,000 in September, and check your balance in December. Because the money was invested for completely different lengths of time, only XIRR can accurately tell you what your annualized percentage return was.

Key Takeaways

•XIRR is the most accurate metric for tracking the returns of a Systematic Investment Plan (SIP).
•It accounts for the 'Time Value of Money'—money invested earlier impacts the return more than money invested recently.
•It is a built-in function in Excel and Google Sheets heavily relied upon by financial planners.

Related Terms

CAGR Mutual Fund