By Gullak Team

Jan 19, 2023

5 min read

Financial literacy encompasses the knowledge of various financial tools and their intelligent application. In this realm, investments play a vital role, providing a path to wealth accumulation. One tool used by investors is XIRR (Extended Internal Rate of Return). If you're an investor, or planning to dive into the world of investments, understanding the meaning of XIRR in assets could be a game-changer for you. Let's get started and delve deep into what XIRR means in your investment journey.

XIRR means Extended Internal Rate of Return. It's a method used to calculate returns on investments where transactions occur at different intervals. In simpler terms, XIRR means your personal rate of return - it reflects your actual gain from investments.

Consider this: You invest sporadically throughout the year in an instrument. At some point, you decide that it's time to reap the benefits and withdraw your money. You calculate the invested amount versus what you received upon redemption and you have your profit figure. But does this method truly reflect how well your investments performed? This is where understanding what XIRR means becomes crucial!

Let's assume you've made several SIPs (Systematic Investment Plans) over five years with varying amounts like Rs. 4000, Rs. 9000, Rs. 5000, Rs. 4000, and Rs. 6500 respectively, yielding a total return of Rs. 53,000 at the end of 5 years. If calculated traditionally, your return on investment would be around 22%.

But here's the catch: Traditional methods don't account for time value or irregular investment frequencies—factors that significantly influence the actual returns. Recognising this, the financial world introduced XIRR means to give a more accurate picture of your returns.

To truly comprehend what XIRR means, let's break down its formula:= XIRR (values, dates, guess)

- Values: The series of cash flows that includes your investments and the redemption amount.
- Dates: The corresponding dates for each transaction.
- Guess: An estimated return.

Adopting this formula in Excel gives you a more precise perspective on your investments. It caters to irregularities in investment intervals and helps you calculate a consolidated return considering the timings of your investment and withdrawals.

For instance, you've made a SIP investment over six months, starting from 01/01/2017 till 01/06/2017, with each instalment being Rs. 5000. You decide to redeem on 01/07/2017 and receive Rs. 31000 in total. Here's how it looks:

Cash Flow Dates | Cash Flows |
---|---|

01-01-2017 | - 5000 |

03-02-2017 | - 5000 |

01-03-2017 | - 5000 |

01-05-2017 | - 5000 |

01-05-2017 | - 5000 |

25-06-2017 | - 5000 |

01-07-2017 | 31000 |

Using Excel's XIRR function, you'll find an XIRR value of 11.92% This illustrated example demonstrates why comprehending XIRR is pivotal for astute investing.

CAGR (Compounded Annual Growth Rate) is often used as a standard measure to evaluate performance of an asset over a specified period. However, it falls short when it comes to calculating returns on personal investments. Calculating the CAGR for a monthly SIP could turn into a herculean task as it would require calculating the CAGR for each investment over different periods.

On the other hand, XIRR means or aims to simplify this process by providing a unified return rate for your investments. Thus, if you're looking to evaluate returns on your investments, XIRR is the way to go.

Investment decisions are always backed by an expectation of returns. Understanding what XIRR means in this context is a key component of rational investment decision-making. It allows you to map your return journey accurately and helps you benchmark against other investment opportunities.

Moreover, understanding the relevance of what XIRR means becomes more important when you consider assets like Gullak Gold+ that offer extra 5% returns(in gold grams) on top of gold’s annual returns of ~11%pa. Understanding the XIRR here will help you compare the Gullak Gold+ better with other assets & make informed investment decisions for your wealth creation journey.

Frequently Asked Questions

What does XIRR means in investments?

Why should I use XIRR instead of CAGR for calculating returns?

How can I calculate XIRR?

Is XIRR important for investments?

Are there any digital tools that can help me calculate XIRR easily?