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What is Extended Internal Rate of Return (XIRR)? What is XIRR in Mutual Funds?

Updated: Dec 30, 2022


Introduction: What is XIRR and where is it used?

XIRR stands for Extended Internal Rate of Return. It is a variation of the Internal Rate of Return (IRR) calculation that allows for non-periodic cash flows, or cash flows that do not occur at regular intervals.

Like the IRR, the XIRR is a measure of the profitability of an investment, and it is used to compare the profitability of different investments. It is calculated by finding the discount rate that makes the net present value (NPV) of an investment equal to zero.

To calculate the XIRR, you need to know the initial investment, the expected cash flows from the investment, and the dates on which those cash flows are expected to occur. You can then use a financial calculator or a spreadsheet program to calculate the XIRR.

It is important to note that the XIRR is only one measure of the profitability of an investment, and it may not always be the best measure. It is also important to consider other factors, such as the risk associated with the investment and the impact on overall portfolio diversification, when evaluating an investment.

Difference between XIRR & IRR(XIRR vs IRR)

The main difference between XIRR and IRR is that XIRR allows for non-periodic cash flows, while IRR assumes that cash flows occur at regular intervals.

IRR is a measure of the profitability of an investment, and it is calculated by finding the discount rate that makes the net present value (NPV) of an investment equal to zero. To calculate the IRR, you need to know the initial investment, the expected cash flows from the investment, and the length of time over which the investment will be held.

XIRR is also a measure of the profitability of an investment, and it is calculated in the same way as IRR, but it allows for non-periodic cash flows. To calculate the XIRR, you need to know the initial investment, the expected cash flows from the investment, and the dates on which those cash flows are expected to occur.

Both IRR and XIRR are useful for comparing the profitability of different investments, but XIRR is more flexible because it can handle non-periodic cash flows. This can be useful in situations where the investment generates cash flows at irregular intervals, such as investments in real estate or private equity.

It is important to note that both IRR and XIRR are only one measure of the profitability of an investment, and it is important to consider other factors, such as the risk associated with the investment and the impact on overall portfolio diversification, when evaluating an investment.

What XIRR in a Mutual Fund?

In a mutual fund, the XIRR is a measure of the profitability of the fund's investments. It is calculated by finding the discount rate that makes the net present value (NPV) of the fund's cash flows equal to zero. To calculate the XIRR, you need to know the initial investment in the fund, the expected cash flows from the fund's investments, and the dates on which those cash flows are expected to occur. The XIRR is a useful measure for evaluating the performance of a mutual fund because it allows for non-periodic cash flows, which can be common in mutual funds. For example, a mutual fund may receive dividends from its investments at irregular intervals, or it may make capital gains distributions at irregular intervals. The XIRR takes these non-periodic cash flows into account when calculating the fund's profitability. It is important to note that the XIRR is only one measure of the profitability of a mutual fund, and it is important to consider other factors, such as the risk associated with the fund and the impact on overall portfolio diversification, when evaluating a mutual fund. It is also important to compare the XIRR of a mutual fund to benchmark indices or other mutual funds in the same category to get a sense of how the fund is performing relative to its peers.

XIRR vs CAGR. What is the difference between XIRR & CAGR?

XIRR and CAGR are both measures of the profitability of an investment, but they are calculated differently and can give different results. XIRR (Extended Internal Rate of Return) is a measure of the profitability of an investment, and it is calculated by finding the discount rate that makes the net present value (NPV) of the investment equal to zero. To calculate the XIRR, you need to know the initial investment, the expected cash flows from the investment, and the dates on which those cash flows are expected to occur. CAGR (Compound Annual Growth Rate) is a measure of the average annual rate of return on an investment over a period of time. It is calculated by taking the nth root of the total growth rate, where n is the number of years in the period being considered. To calculate the CAGR, you need to know the initial investment, the ending value of the investment, and the number of years over which the investment was held. XIRR is useful for evaluating investments with non-periodic cash flows, such as investments in real estate or private equity. CAGR is useful for evaluating investments with periodic cash flows, such as mutual funds or stocks, and for comparing the performance of different investments over time. It is important to note that both XIRR and CAGR are only one measure of the profitability of an investment, and it is important to consider other factors, such as the risk associated with the investment and the impact on overall portfolio diversification, when evaluating an investment.

Is XIRR Annualized?

The XIRR (Extended Internal Rate of Return) is not necessarily an annualized measure of the profitability of an investment. It is calculated by finding the discount rate that makes the net present value (NPV) of the investment equal to zero, taking into account the initial investment and the expected cash flows from the investment, as well as the dates on which those cash flows are expected to occur. The XIRR is useful for evaluating investments with non-periodic cash flows, such as investments in real estate or private equity, because it allows for the inclusion of cash flows that do not occur at regular intervals. However, the XIRR does not automatically annualize the returns, so the result may not be directly comparable to annualized measures of return like the annualized rate of return or the compound annual growth rate (CAGR). To annualize the XIRR, you can divide the XIRR by the number of years over which the investment was held and multiply it by the number of periods per year. For example, if the XIRR for an investment held for 5 years is 10%, and the cash flows occurred quarterly, the annualized XIRR would be (10% / 5 years) * 4 periods per year = 8%. It is important to note that the XIRR is only one measure of the profitability of an investment, and it is important to consider other factors, such as the risk associated with the investment and the impact on overall portfolio diversification, when evaluating an investment.





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