Understanding XIRR
When you invest a lump sum on a single day and check its value years later, calculating your return is easy (using CAGR). However, if you invest money systematically (like a monthly SIP) or randomly add and withdraw funds from a stock portfolio, simple formulas break down. That is where XIRR (Extended Internal Rate of Return) comes in.
If you want to project future returns based on a fixed monthly deposit instead of calculating past returns, use our SIP Calculator.
Why use XIRR over CAGR?
CAGR (Compound Annual Growth Rate) only looks at the beginning value, ending value, and total time passed. It completely ignores when you added money in the middle.
If you invest $10,000 on January 1st and it grows to $12,000 by December 31st, your return is 20%. But what if you invested $0 on January 1st, and $10,000 on December 1st, and it grew to $12,000 by December 31st? You made the same $2,000 profit, but you did it in just one month! Your annualized return is actually massive.
XIRR assigns a specific "weight" to every cash flow based on how long it was invested, giving you your true annualized performance.
How to Structure Cash Flows
To accurately calculate XIRR, you must structure your inputs correctly using positive and negative signs to indicate the direction of the money:
- Investments (-): Any money you deposit, buy shares with, or put into the fund must be entered as a negative number (e.g., -500).
- Withdrawals (+): Any dividends received, cash withdrawn, or shares sold must be entered as a positive number (e.g., 200).
- Current Value (+): To find your return today, you must add a final row with today's date and the current total value of your portfolio as a positive number.