How do you calculate your returns when you every year you invest different amount and at the end you receive your Money back? Suppose your invest 5000, 10000, 6000, 4000 and 6500 in 5 yrs and Get 53,000 at the end of 5 yrs then what is your Return? It’s 17.4%. The concept is called IRR. Read below to understand more:

So Here we will learn two things IRR and XIRR

What is IRR and How to Calculate it?

IRR is Internal Rate of Return and it is used to calculate the returns given some amount at a fixed interval i.e. after every 3 months or after every 1 yr. The only thing which matters is that there should be equal distance between two installments. We will learn how to Calculate IRR in Excel Sheet. You would also love to read what is NPV ( Net Present Value) .

How to calculate?

- Enter your Investments (amount which you paid) in each row (you have to put “-” before each value)
- Enter the Amount you Received at the end (put “+” after that amount)
- Formula: =IRR(values)( place your values put the range of cells which contains values) see below:

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Use this Spreadsheet to calculate IRR for yourself

Things to NOTE

- The values need to be a set of Positive and Negative Values
- The last value is the amount you receive
- Any amount Invested will be Negative so if you invest Rs 10000, put -10000
- Any amount you Receive will be Positive so if you get Rs 5000, put +5000
- All the payment or receiving of money are equidistant, Like 1st of every month OR May 15th Every year
- All the payments are assumed to be yearly by default. If its’ some other time frame like monthly or quarterly use XIRR and put specific dates.

In the above example, the CAGR return was 17%. See this video post to understand how to calculate CAGR .

What is XIRR and How to Calculate it?

IRR does not solve one problem and that is when the payments are at Irregular interval. In that case we use XIRR. So in a Spreadsheet we put the date and the value both. See the example below:

How to Calculate

- Put Date and Value for each row
- At the last row put the Date and amount you received
- Put the formula as: =XIRR(values, dates), values and dates are the cell ranges

Use this Spreadsheet to calculate XIRR for yourself

In the above example the CAGR Return was 38.96% (I have multiplied the return by 100 the actual value will be .3896)

Real Life scenario when you can use it

Scenario 1

Suppose you Invest in a Mutual Funds per month on your own , you invest on 15th of every month in year 2006

- June 15 you invested 5000
- July 15 you invested 6000
- Aug 15 you invested 3000
- Sep 15 you receive 5000 (dividend)
- Oct 15 you invested 4000
- Nov 15 you invested 12000
- Dec 15 you Sell everything and Receive 35000

You can use IRR in this case and calculate your returns , the values you will be -5000 , -6000 , -3000 , +5000 , -4000 , +12000 , Calculate the IRR and put it as comments , lets see if you are correct or not ?

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Scenario 2

You can also compare two business ideas using the XIRR , and decide which one is better then other . In any business concept you have to invest money and you get back some return , but these returns can be irregular and different amount every time , In that case you can use XIRR and compare the returns of both business and decide the one which has better XIRR

Note : the formula can give answers in a but different ways on Excel , OpenOffice spreadsheet , google docs or Zoho Spread sheet . Use this Spreadsheet to calculate IRR and XIRR for yourself . The spreadsheet is shared , so please dont make any changes other than “values” and “dates” .

Comments ? I would love to hear if these concepts are of use to you or can be of any help to you . is IRR a good way of measuring returns ?

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{ 97 comments… read them below or add one }

nice information

keep it on

really good

P.S.

I am unable to use XIRR formula

its asking for a guess value in excel please clarify

Also at many offices-Its not possible to view your video tutorials or excel spreadsheets

Please see if you can do something

Aditya

Nice writeup Manish.

Aditya

If you are using MS-excel, you need to have analysis toolpak installed to get XIRR. Go to Tools -> Add Ins -> Analysis Toolpak

@Aditya

So when you put the formula for IRR or XIRR , you put some random value like .1 or .2 also as Guess value , so formula looks liks

=IRR(values , guess value)

= XIRR(values , dates , guess value)

Just put .1 or .2 in place of guess value. I hope it will work .

To download the spreadsheet , go here :

http://www.jagoinvestor.com/2008/02/stuffs-to-download.html

To download videos from youetube you can use keepwid.com tool .

@Sriram

Thanks

Manish

Very Nice Information..With IRR Function You use Insurance Cash Flow…

Manish Can You make One Excel Sheet about How To Use IRR & XIRR Formula With Complete Details ..

Thakns..

Nikhil Shah

wow, I good formula.

I ll search excel for somemore..hehe

Regards

Yogi

@Nikhil

What other information do you need ? I thought that this can be called as the "information on how IRR and XIRR can be used" ?

@Yogi

Thanks

IRR/XIRR are good for relative comaparisions.

But what does it mean in absolute terms? Does a 17% IRR mean I get 17% annualised return on an average for every installment?

WhiteLotus

I've also heard a term by the name of MIRR.. NAy idea regarding what is it??

irr is used as a concept to calculate the break-even discount rate when u have a conventional cash flow, i.e., one outflow followed by multiple inflows during the entire life of the project

but in case of non-conventional projects, where we have multiple outflows during the life of the project, we use the concept of mirr (modified int rate of return), because simple irr will give us multiple values. using irr will give us a number of discount rates, equivalent to the number of outflows.

Khagesh

Isin’t XIRR ? whats the difference between XIRR and MIRR ?

Manish

@Whitelotus

yes , it means the annual CAGR return

@karan

http://www.investopedia.com/terms/m/mirr.asp

Can anyone give me an example of the equation to calculate the XIRR?

I want to make an application that calculate an XIRR like excel does. I used the Secant Method to compute the cash flow, but it still have a different result than excel does.

Can anyone give me an example of the equation to calculate the XIRR?

I want to make an application that calculate an XIRR like excel does. I used the Secant Method to compute the cash flow, but it still have a different result than excel does.

Any help would be appreciated

Thanks

@Wayan

I think you should be using some Numerical method to compute XIRR .. There wont be just one formula where you can stuff values and get answer .

Manish

Does XIRR provide annualised return

YES

very gud info Manish.

Thanx. Keep going.

thanks mona .. keep visiting

Manish

Hey Manish,

We are pointing people to your post to explain XIRR.

.-= Manish Jain´s last blog ..Asset Class: Bond’s =-.

Thanks Manish

I can see some people coming in from that link when i checked my live traffic

Manish

i understand this will not work in case I’ve lumpsum invested for x yrs, right. IRR/XIRR is only for regular payments, like SIPs,yrly ULIPs etc, right ?

Sandeep

If you have invested one time then its more easy to find the CAGR .

CAGR = [(final_amount/amount_invested)^(1/tenure)] – 1

Manish

Thanks for the information. Very clearly described. I appreciate your effort.

Raju

Thanks for the comment , keep commenting

Manish

Indeed explained well, my first google search reading for XIRR and I could do this myself.

Akash

thats great to hear

Manish

Hi Manish,

Excellent information. How can I use this IRR/XIRR to check the return I’ve got in MF SIP invested over a period of 3 years? For example investing monthly 1k over 3 years and current value is 42k. So how much is the return, which formula should we use to calculate the return in this case?

If the gap between the investments is same , then use IRR else use XIRR

Manish

Problem to install analysis toolpak, pls guide

Lalit

Ask your question on forum : http://www.jagoinvestor.com/forum/

Thanks for explaining the cocept in such an easily understadable language. Please continue this as your contribution towards educating the educated illiterate.

Welcome . Did you come to this article after seeing the video ?

Manish

Hey your website is of gr8 help to people.

Thanks

thanks Ankita

XIRR formula does not seem to be accurate. I have calculated CAGR with trial-and-error basis and the result is coming significantly different from XIRR especially when CAGR value is more. See the excel sheet in:

https://spreadsheets.google.com/ccc?key=0Apwu-qirgStCdDlMV0RSTmFiUGFZMjFtZDFlU0NnVlE&hl=en#gid=0

My objective was to plot a graph of GAGR agains time to see that how CAGR is varrying and at what goal, one can sell a MF, if he reaches goal.

Debaranjan

What is “Trial and error” in this case ? XIRR can not be wrong , if thats the case you are challanging Microsoft patents !

Manish

Hi Manish,

“Trial and error” is a mathematical (numerical) method to find solution of a equation when direct solution is either difficult or not possible. In case of finding CAGR with a SIP, the formula is Y= (X *(1+r/12)^n-1)*12/r, where Y=Present market value of Mutual Fund ( = present NAV * no. of units of Mutua Fund), r= Annual CAGR, n= no. of months of SIP. Known values are Y, X and n. Our goal is to find out r.

Now, as you can see it is an equation of nth degree polynomial, which is difficult to solve. In numerical analysis, iterative techniques like newton-raphson method or method of bisection can be used, by guessing a CAGR value, and then calculating error (difference) between left side and right side of the above equation. Then process would be continued till the error value is well within accepted limit ( you can never get perfect solution).

Internally XIRR also does iteration, as described in Microsoft help. Actually XIRR has three parameters: XIRR(values, dates, guess) . In general, to start any iteration, an initial value is required. This is the “guess” value i.e. the third parameter. If you do not give the “guess” value, XIRR would assume something random, and the solution can become erroneous.

Microsoft claims “XIRR cycles through the calculation until the result is accurate within 0.000001 percent.” In your article, you have skipped to enter the 3rd parameter. This can be possible chance of variation in the example excel sheet I have given in my earlier post.

I gave an example in the excel: a SIP on HDFC Top 200, starting from 5-Apr-2010 with Rs. 1000, in the 7th month (5-Oct-10). When I gave 57.5% CAGR manually, error value was -3.10, whereas XIRR calculated CAGR was 75.17% resulting into an error of -374.28, whose absolute value is far more than my manual method. The anomaly increases as the CAGR increases.

I check with the SIP calculator with http://www.moneycontrol.com/ . It is also in line with excel.

May be I am wrong; but I need to know where I am wrong. Did I use wrong formula of CAGR? But, I derived CAGR formulae from basic; it is sum of G.P. series.

With best wishes

Debanjan

Debaranjan

Looks like you did lot of study on this . good work

I think there can be one point we are missing , we are not sure if the payments are considered at the end of the period or the starting of the period because thats the only reason I can think for the difference we are getting .

Manish

Hi Manish,

I have considered payment at the starting of the period. So the last SIP will run for zero duration. This means in the previous example, the 7th month SIP will not have any gain. At the beginning of 7th SIP, the 1st month SIP (=X) will run for 6 months growing to X*(1+ r/12)^6; 2nd month SIP will grow to X*(1+r/12)^5 and so on. Now do a simple addition.

At the end I can not trust XIRR; but can trust on basic mathematics of compound interest formula.

- Debanjan Ray

debranjan

I think you should go with the first principles only which is working for you , this whole topic will actually become a big project to study if we do it

Will take up this some time later , In between if you find something insightful in your studies , let me know

Manish

It’s not the question whether you trust XIRR or not. It’s like an eternal truth.

And excel does excellent job in giving you the answer; otherwise you have to break your head in mathematical formulas.

Debanjan Ray, can you just give me a small example where XIRR formula of excel returns false value?

I want to investigate.

Dear Manish,

Could you tell me after calculating IRR how we can tell our client about annualized return say for example he invested 5000 for 11 months (SIP) and latest value is 56504 please guide me and which is good IRR or XIRR ???

Rupert

You can use IRR here , XIRR and IRR are same things ,just that XIRR is for irregular payments !

Thanks for your reply I got it but when you want to convert to annualised how we have to do and which is the better irr or xirr ??

Thanks for your reply I got it but when you want to convert to annualised how we have to do and which is the better irr or xirr ?? How to do annualised for an a SIP investments

What ever IRR you get from for monthly payments , just do this

(1 + Monthly-IRR)^12 – 1

That would give you yearly IRR

Manish

Thanks Sir

This calculation is very useful for my final CFP exam

Welcome

Hi Manish,

So going over your definations, what I understand is that we use XIRR when there are irregular intervals between the payments? (Since IRR assumes regular intervals between payments).

So if I am calculating my returns on equal distance semi-annual cashflows, using IRR and XIRR should give me same results? Or should I not be using the XIRR at all?

Does IRR consider investments on an annualized basis by default?

Wakas

Yes .. IRR and XIRR should give the same answer incase of equi distance payments . Note that IRR will assume that the payments are per year .. incase its for monhtly basis , then all you need to do is consider the returns as monthly and then convert it to yearly returns

Manish

Really good one, which explains the IRR & XIRR in a simple and value added way.. Thank u…

Lino

Good to hear that you learnt it easily

Manish

DEAR SIR

NICE ARTICLE SIR . EVEN THOUGH I UNDER STOOD THE CONCEPT OF IRR FUNCTION I AM UNABLE TO GET ANNUAL RETURN RATE FOR MONTHLY SIP AMOUNT BY USING XIRR FUNCTION I AM GETTING #NAME AS ANSWER. CAN YOU KINDLY CLARIFY .

Can you put all the numbers with date here ?

https://docs.google.com/spreadsheet/ccc?key=0AkUngjHf_bCldGZNRENhbFNvTnR1a25vUGM5MGhFeEE

Shows a sample SIP investment calculation.

Is my assumption correct?

IRR(monthly-values) * 100= monthly-IRR %

IRR(monthly-values) * 100 * 12 = yearly-IRR %

XIRR(regular-monthly-values, date-values) * 100 = yearly-IRR %

If XIRR() is an extension of IRR() with date (regular or irregular), why is there a 1 % difference between IRR result and XIRR?

Thanks

Will look at this soon … kindly email me

Ref. http://www.brighthub.com/office/project-management/articles/99310.aspx

Added one more rate to the page. Monthly to Yearly IRR conversion calculated using ‘(1+r)^12 – 1′ is close to XIRR(). So I think that answers my question.

If I have a series of outflows and inflows, and want to see what the rate or return is on this, can I use XIRR? I am working out a bisiness plan with monthly payments and revenues, and the net result of the costs and revenues is sometimes profit and sometimes loss.

Must IRR/XIRR have all outflows, and the last one inflow? Or can they vary?

You can use XIRR in this case , it can have multiple inflows and outflows

Dear Manish,

I am really impressed. With your Reply that I consider IRR Or XIRR without me knowing what it is, I started searching on google, what are these terms. And before breaking my head on the mathematics involved, I got your Rejoinder to your Reply which explained what I needed with excellent analytical debate.

Indeed great and many many thanks.

Anand Gosavi.

Thanks for your appreciation !

Hi Manish,

My online MF SIP portfolio tracker is using XIRR instead of IRR to show the return being generated. Any reason behind the usage of XIRR even if it’s monthly SIP plan with equal interval?

Thanks/-Raj.

IRR just one case of XIRR ! .. Hence they might be using the highest standard ! .. Its like they must have implemented only XIRR so that all cases are handled, it might happen that some one is manually doing it on different dates and same algo will handle that case also , Whats the harm in that !

Thanks guys …good information especially converting monthly to Annual IRR. which approximately equals IRR & XIRR values.

Welcome

thanks for giving good explanation

Welcome

dear manish,

you did good job….. you gave excellent information to us. i appreciate your kind information. i have question for you? can u help me out? i have some goals. and i would like to make SIP for each goal…. like car, (in 3 year, 6 lac ) flat ( 6 year, 75 lac) and retirement plan (2.5 cr.). i am working in private bank. my annual salary is 1.8 lacs. my age is 24. plz give me some information regarding how much invest in each SIP and how much amount., which kind of instruments and portfolio i will used for investment…plz help me out

is there any website/software which computes portfolio return(portfolio consisting of stocks,mutual funds, fixed deposits, gold etc) based on time weighted methodology rather than dollar weighted (which is similar to xirr)

Try Mprofit or Perfios

great. trhanks a lot.

Hi,

I have never purchased or invested in any shares or egold or mutual funds. My earning is nominal and has no savings.Now I wish to invest a little amount in either egold or shares or mutual funds. Can you pliz help me where shall I invest to get a good return?

I would really appreciate if you can help me out in this for one time as I am a layman when it comes to investment. Thanks.

In long term, only equity can deliver you good return or real estate

Manish, I tried out XIRR with my mutual fund investments and wanted your insight on some observations. One of my MFs is at a loss (i.e. current value is lower than principal). When I use XIRR, the value is lower than the actual return.

To quote an example, I invested in UTI Infrastructure in 2007-2008 in 13 SIPs of Rs. 2,500 each. The total investment is Rs. 32,500. The present value of my investment is Rs. 29,946. The absolute return is -7.86%. However, XIRR is coming to -1.64%.

Isn’t it misleading that XIRR is showing a lower negative return? Or am I not interpreting this result correctly? Please guide me.

Can you also put the dates which you have put . Because IRR is the main return you got , not the absolute return .

Let me give an example.

If you invested 1000 Rs on 1-Jan-2009 and got 500 Rs only on your investment on 1-Jan-2013, then your absolute loss is 500 Rs i.e. 50%.

But if you calculate XIRR over the period, it comes out to be -15.90%

This is the loss every year.

Got it?

Yes I got that Anand , but not sure what is your confusion ?

I was trying to clear Karthikeyan’s confusion, not yours.

I learnt this from you only!

XIRR is showing the correct value. The value -1.64% is telling us that the value of investment is decreasing by 1.64% every year.

Not decreasing, but what is the return till now !

Date Cash Flows

26/06/13 (160,488) 12.36% 12.94%

26/09/13 –

26/12/13 – IRR XIRR

26/03/14 –

26/06/14 –

26/09/14 –

26/12/14 –

26/03/15 –

26/06/15 –

26/09/15 –

26/12/15 –

26/03/16 –

26/06/16 –

26/09/16 –

26/12/16 –

26/03/17 7,134

26/06/17 7,293

26/09/17 7,293

26/12/17 7,213

26/03/18 7,134

26/06/18 7,293

26/09/18 7,293

26/12/18 7,213

26/03/19 7,134

26/06/19 7,293

26/09/19 7,293

26/12/19 7,213

26/03/20 7,194

26/06/20 7,273

26/09/20 7,273

26/12/20 7194

26/03/21 7,134

26/06/21 261643

In the said cash flows which are at regular interval we are getting different IRR and XIRR . The difference is quite significant…

Pls suggest

The IRR assumes yearly payments

xirr is 12.94 and irr is 12.36%

When the cash flows are at a constant rate – quarterly.. thought certain quarters have no cash flows

Hi Manish,

How I can calculate final value using IRR/XIRR. E.g. the use case I have is, say I know the approximate IRR rate of one of my insurance policy is 6% & I am paying 10000/yr for 20 yrs. I want to get an idea how much my final return value would be. I tried some function NPV/FV in excel, but could not figure out..

Thanks,

IRR is something which needs to be calculated backwords . 6% which you are assuming is just a scenario !

Simply awesome explanation. I didn’t look any other site after reading this article. I am trying to calculate XIRR of my MF portfolio.

Thanks Abhijit !

NOT BEEN ABLE TO GET XIRR CALCULATION. THE DATE AND VALUE FIELD ARE ENTERED AS YR/MONTH/DT AND OUTFLOW IN NEGATIVE BUT THE CALCULATION SHOWS #VALUE. PLS HELP

Can you share the snapshot ?

hi Manish.

Thanks for this good article.

I had a small question.

To calcualte retruns on SIP or some stock scripts which i have bought over few months, can i use the WEIGHTED AVERAGE i.e. can i compare the weighted avg cost price vs current value to give me returns ?

Basically i wanted to understand when to use IRR & when to use some other tool to calculate retrun.

Thanks

I am not sure what is your question ? Look at this video http://www.jagoinvestor.com/2011/02/calculate-insurance-policies-returns-video.html

Hi Manish.

What i meant was, suppose in invested monthly in a equity MF SIP @ 2000 INR/month for 21 months. Now the current value is 62k. So, if i calculate IRR it comes as 4% (isnt this too low return?). Where as if i calculate using Weighted Avg (wt avg purchase cost comes to 42k) – the retrun is 20k/42 k = ~48% ??

Is this correct ?

Thanks

Yea .. the returns are too low, but then markets have moves like that only.. I hope you know that mutual funds returns are not guaranteed !

Thanks for your reply Manish.

Wanted your views on comparsion of returns basis IRR calculation & weighted avg ? My Avg Cost, because of the market fluctuation is 42k. While current return is 62k – so by this is my return 48% ?

Which one is a better tool for returns calculator in this case specifically.

Its IRR which you should look at !

-5000

-6000

-3000

5000

-4000

-12000

35000

11% IRR