When you invest in mutual funds, you do so intending to earn a good return. Returns are the primary benchmark against which you pick and choose a mutual fund to invest in. There are two ways to calculate the returns of a mutual fund scheme. The first uses the compound annual growth rate (CAGR), and the second uses the extended internal rate of return (XIRR). This article talks about the latter. Keep reading to find out more.
What is XIRR in mutual funds?
The extended internal rate of return or XIRR, as it is popularly known, is used to calculate the returns of a mutual fund scheme when you invest through a SIP. Opposed to a lump sum investment, SIPs involve multiple small investments made at different points throughout the tenure. XIRR considers all of these investments and calculates the average annual return from every SIP installment. This is then adjusted to determine the overall return from your mutual fund investment.
What is the formula to calculate XIRR in mutual funds?
XIRR can only be calculated using Microsoft Excel. To calculate the XIRR of your mutual fund investment, you can enter the date of every SIP and the amount of each installment. You can then use the following function:
= XIRR (value, dates, guess)
Steps to calculate XIRR in Excel:
- Enter all investments in negative in the first column. For instance, if you invest Rs. 5,000 every month, you will enter (-5000).
- Enter the dates of each investment in the next column.
- Enter the current value of your investment and the current date in the last column.
- Use the XIRR function by selecting the investment values first, followed by the dates.
- Multiply the answer by 100, and you will have the XIRR.
What are the advantages of using XIRR when calculating mutual fund returns?
Here are the advantages of using XIRR when calculating returns from mutual funds:
XIRR may offer a better way to calculate your mutual fund returns. This method of calculation computes the annualized return of a scheme. Moreover, it considers all irregular cash inflows and outflows and then gives the return. This is a more conclusive result than CAGR, which only calculates the return based on the starting and maturity value of the investment.
What method should you consider when investing in mutual funds?
CAGR may be more helpful when you are comparing different mutual fund schemes. It can give you the overall returns based on the starting and ending values over a particular investment horizon. On the other hand, XIRR can be used to calculate your investment returns from a mutual fund where you are investing through a SIP.
To sum it up
Now that you know how to calculate XIRR in a mutual fund use it to make better investment decisions. The Tata Capital Moneyfy App offers several mutual fund schemes that you can invest in. So, download the app and start investing!