What is XIRR in Mutual Funds and How to compute the same?

What is XIRR? How to compute the same?

Cash inflows and outflows may not always be evenly matched and instead, these could be at irregular intervals.

Specially, in a mutual fund SIP. In the case of SIP, there are investments made at regular intervals, some withdrawals, then investments and so on. There is no fixed pattern of such investments and it makes calculating the exact return on these investments a bit difficult.

XIRR or extended rate of return is a measure of return when multiple investments at different points of time are made in a financial instrument.

SIP Investments Method

In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. SIP investments happen on a pre-decided date and even the amount is fixed and depending on the NAV of the scheme on that day, you get a certain number of units. You can read more about SIP in our Article http://www.wealthcafe.in/why-should-you-do-a-sip/

Hence, you keep accumulating units from the day your SIP starts. On the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day). You may also choose to redeem a part of your investments as and when you need them.

XIRR is used to calculate the return in the case above where various investments are made on different dates and the simple return formula is not applicable.

XIRR can be computed using an excel as excel has an inbuilt XIRR formula. To compute XIRR, we do not need the NAV amount or number of units.

The details required :

  1. SIP Amount
  2. SIP dates
  3. Any lumpsum Investments
  4. Date of such investments
  5. Redemption Amounts
  6. Date of Redemptions

Steps to Compute XIRR. (The steps are explained with reference to the image below)

Step 1 – Enter all the transactions in column B

Step 2 – In the next column (Column C), enter all the amounts of SIP and the lump sum investments. All the investments amount should be in negative. Also, any lump sum amount should be added to this column and the same should also be in negative.

Step 3 – In the case of redemption, add that amount in Column C in positive.

Step 4- In the next box, enter the XIRR formula which is = XIRR (select all dates, select all values)*100. This shall give you the XIRR amount.

You can see the extract of the excel in the photo below.



Factors to check before you Invest

Choosing an Investment product is the most difficult decision for an Investor. Investments in products are nothing less than a marriage wherein a number of factors need to be considered before one takes the final decision: Return: This is the first factor to be considered while making an investment decision. Depending on the returns one expects to earn, the investment is chosen. Equities offer higher returns compared to deposits, but they also have a higher volatility associated with them. One cardinal rule for investors here is, Higher the Risk, Higher the Return one can expect on his investments. Risk: Risk refers to variability in returns. The risk associated with an investment is an equally important factor and is ignored by investors at times. Investors, sometimes, choose a product with a higher return without looking at the associated risks. Ex: If Product A offers a 15% return with an 18% risk(measured by Standard deviation) and Product B offers 16% with a 25% risk. Though Product B yields a higher return, Product A is better than Product B on a risk-adjusted basis. Investment Constraints  The amount of risk that an investor can take in search for returns is affected by the following factors:
Marrying products with Investor Goals
Time Horizon: A longer time horizon enables an investor to take higher risk. A long term horizon evens out the volatility associated with equities and real estate investments. If the investor needs to withdraw the money in the near term, it is better to invest in debt instruments which offers a lower return but have a higher degree of certainty with the investment. Liquidity: Liquidity refers to the ability to sell an investment at a fair value with minimum associated costs. Equities score over Real Estate investments in this parameter. One can sell equity investments at the prevailing market price and receive the sale proceeds in a couple of days(T+2). Real estate investments suffer from the unavailability of their market price and have large transaction costs. Taxation: Taxation has an impact on reducing the net returns in the hands of the investors to the extent of taxes paid to the government. Returns from various investments should always be evaluated post-tax. Ex: Holding other factors constant, if a Fixed Deposit offers 10% taxable and the PPF offers 8% tax-free rate of return, for an investor who pays tax at the 30% slab rate, the PPF offers higher post-tax returns. Regulatory Issues and Other factors: Regulatory factors may impose restrictions on the minimum and maximum amount that can be invested in a product. A certain category of investors is not allowed to invest in certain instruments. For example, Only senior citizens can invest in the Senior Citizen Savings(SCSS) (Refer       ) and up to a maximum of INR 15,00,000 only. Anticipatory changes in regulatory factors also have an impact on the choice of investments. While making an investment decision, an investor needs to consider all the above factors in sync with each other. Keeping in mind the above factors, the properties of the various Investment products need to be matched with the goals of the investor for a perfect marriage.

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