XIRR, the full form of which is Extended Internal Rate of Return, is the single annualised rate at which the net present value of all dated cash inflows and outflows equals zero. Every rupee invested or withdrawn is counted from its own date, so the rate reflects how long each amount stayed invested.
Anyone wondering what is XIRR can think of it as the internal rate of return (IRR) with a specific date assigned to each cash flow. It suits SIP and SWP instalments, top-ups, A dividend is a part of a company's profit that the board decides to pay to shareholders, usually in cash, in proportion to the shares held. Read the full meaning of Dividend and part-redemptions, where money moves in and out on many different dates.
It is not a separate concept from compounding, and it can be seen as the annualised rate that equates all dated cash flows, which is the same as The constant yearly rate at which an investment would have to grow, with compounding, to reach its ending value from its starting value over a period. Read the full meaning of CAGR when there is only one investment and one withdrawal.
How XIRR is worked out
In Excel, the rate is found with the formula =XIRR(values, dates). The amounts invested, such as SIP instalments and lump sums, are entered as negative values, while redemptions, SWPs and dividends are entered as positive values. The current value of the holding is added as a positive amount against today's date.
For an individual investing Rs 10,000 a month for 12 months, the absolute gain is worked out on the total amount put in. Later instalments stay invested for fewer months than the first ones, so the XIRR will come out well above this plain gain. If the holding is worth Rs 1.3 lakh a month after the last instalment, the XIRR will work out to nearly 16% a year.
XIRR turns negative when the current value of the investment is below the total amount invested.
Why it matters and how it differs from CAGR
Absolute return ignores the date of each instalment, so a SIP investor can misread the figure.
A common rule of thumb uses CAGR for a lump sum and XIRR for SIPs, both for periods of more than one year.
CAGR assumes one investment on one date, so it cannot fairly measure a SIP and will usually give a misleading return.