XIRR: Measuring Returns on Regular Investments

Why CAGR doesn't work for SIPs and other investments made at different times, and how XIRR calculates a single annual return that accounts for timing.

If you invest 5,000 rupees every month through a SIP for three years, how do you measure your return? Each instalment was invested for a different length of time: the first for three years, the last for just a month. CAGR can’t handle this. XIRR can.

What XIRR is

XIRR stands for extended internal rate of return. It calculates the single annual rate of return that makes the value of all your investments and withdrawals, at their actual dates, add up to your current value.

In simple terms: it asks, “What steady annual return would have turned all my payments, made on these dates, into what I have today?”

How to calculate it

Spreadsheet programs have an XIRR function. You list:

Each investment as a negative number, with its date.
Each withdrawal as a positive number, with its date.
The current value as a positive number, with today’s date.

The function returns the annual return. Most mutual fund apps and statements show XIRR for SIP investments.

Why timing matters

Suppose markets fell in your second year and rose sharply in the third. Your SIP bought more units cheaply during the dip, which boosts your XIRR. Two investors in the same fund can have different XIRRs if they invested at different times or amounts.

Comparing XIRR and absolute return

Absolute return simply compares total gain with total invested: if you invested 1.8 lakh and it’s now worth 2.2 lakh, that’s about 22 percent. But it ignores how long the money was invested.
XIRR annualises the return, accounting for timing, so it can be compared with fixed deposit rates or other investments.

Uses beyond SIPs

Irregular investments and withdrawals.
Comparing insurance-cum-investment plans with alternatives.
Evaluating rental property with changing income and costs.

Reading the app

An investor's app shows her SIP: total invested 3.6 lakh rupees, current value 4.5 lakh, absolute return 25 percent, XIRR 11.8 percent. The XIRR tells her the annual return she earned, which she can compare with a fixed deposit's interest rate.

Thinking absolute return is the same as annual return

Absolute return ignores time. XIRR converts returns on money invested at different dates into an annual rate.

Key takeaways

XIRR measures annual returns for investments made at different times.
It accounts for the date and size of every investment and withdrawal.
Spreadsheets and fund apps calculate it automatically.
Use XIRR, not absolute return, to compare SIPs with other options.