XIRR is an abbreviation for Internal Rate of Return. (We will get to the X part later). In comparison, CAGR is the Compounded Annual Growth Rate. When we use CAGR, it gives us how our mutual fund investment has fared on its own...
We use CAGR when we gauge the mutual funds’ performance. When you gauge the value of your investments, you use XIRR. So if you are doing an SIP every month you will require XIRR to evaluate what money you have made.
How to calculate XIRR?
To calculate XIRR, you will require three essential attributes. Date, Cash Flow and Portfolio Value.
XIRR can be easily calculated using Microsoft Excel. Excel provides an inbuilt function to calculate XIRR.
XIRR formula in excel is:= XIRR (value, dates, guess)
This, will give you your own XIRR. Your money management abilities – adding & withdrawal of investments – are then going to be calculated through your XIRR.
You can use XIRR over time and check how your investments have fared.
Limitations of XIRR
XIRR has certain limitations as it overemphasizes cash flows. For instance, your cash flows may not match the market momentum. If you happen to invest in the month when the market is at low and by the end its peak, then your XIRR will be marginal. Your XIRR will be overshadowed because you added money when the market was high, thus receiving lesser units.
Thus, XIRR is your asset allocation or cash-flow based return. You might need it to see how well your investment has performed.
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