How XIRR measures real returns
XIRR is the annualised return of an investment where money went in and came out on irregular dates. It is the only correct way to measure a SIP, a portfolio you added to over time, or any set of cash flows that CAGR cannot handle.
Formula
Find r such that Σ [ CFᵏ ÷ (1 + r)^(dᵏ ÷ 365) ] = 0
- CFᵏ — each cash flow, negative for money invested and positive for money received
- dᵏ — days between the first cash flow and that cash flow
- r — the annualised rate the solver converges on
- There is no closed-form answer; the rate is found by iteration
Why timing changes the return
Two investors can put in the same total amount and end with the same value, yet have very different XIRRs. The one who invested earlier had money working for longer, so the same profit represents a lower annual rate.
That weighting by time is exactly what XIRR captures and what a simple profit percentage misses. It is also why your XIRR usually differs from the fund’s published return — the fund reports its own performance, not the timing of your instalments.
Entering cash flows correctly
Use negative amounts for money you invested and positive amounts for redemptions or the current value. Every SIP instalment is a separate negative entry on its own date, and the final valuation is a positive entry dated today.
The sequence must contain at least one negative and one positive value, otherwise no rate can satisfy the equation. Getting a sign wrong is the most common reason the result looks absurd.
Reading the result honestly
XIRR is already annualised, so a figure of 12% means 12% a year, not 12% in total. For holding periods shorter than a year the annualised figure can look extreme — a 3% gain over two months annualises to roughly 20%, which says little about the year ahead.
Very irregular cash flow patterns can also produce more than one mathematically valid rate. If the number looks implausible, check the dates and signs before believing it.
Where to use it
XIRR is the right measure for SIP performance, a portfolio built through years of contributions, real estate purchased with staged payments, and insurance-linked plans with annual premiums and a maturity payout.
For a single investment held over a single period with no additions, CAGR is simpler and gives the same answer.
Example: two investments, one redemption
- 1 Jan 2023
- −₹1,00,000 (invested)
- 1 Jul 2023
- −₹50,000 (invested)
- 1 Jan 2025
- +₹1,80,000 (redeemed)
- Total invested
- ₹1,50,000
- Absolute gain
- ₹30,000 (20%)
- XIRR
- ≈ 10.4% p.a.
The 20% absolute gain becomes about 10.4% a year once the two-year period and the later second instalment are accounted for. Had the second ₹50,000 gone in on day one, the same final value would represent a lower annualised return.