XIRR or Extended Internal Rate of Return is a method used to calculate returns on investments where there are multiple transactions happening at different times. It is a single rate of return that provides the current value of the entire investment when applied to every installment and redemptions, if any. XIRR is a more powerful function in Excel for calculating the annualized yield for a schedule of cash flows occurring at irregular periods.
In the case of mutual funds, XIRR can take care of all scenarios and helps you calculate a consolidated return considering the timings of your investment and withdrawals. It is used to calculate returns on investments where there are multiple transactions taking place in different times. XIRR can be easily calculated using Microsoft Excel, which provides an inbuilt function to calculate XIRR.
To calculate XIRR in mutual funds, all cash-outflows (SIP instalments, lump sum purchases, etc.) have to be entered as negative values (affix minus sign before the amount) and all cash-inflows (SWP, dividends, redemptions, etc.) have to be entered as positive values. If you have not yet redeemed all your units, then the current investment value needs to be entered along with the date of NAV to calculate the XIRR of your MF investment.
In summary, XIRR is a method used to calculate returns on investments where there are multiple transactions happening at different times, and it is a more powerful function in Excel for calculating the annualized yield for a schedule of cash flows occurring at irregular periods. It is used to calculate returns on investments in mutual funds where there are multiple transactions taking place in different times, and it can be easily calculated using Microsoft Excel.
