India’s mutual fund industry has seen steady growth in recent years. As of February 2025, the Indian mutual fund industry’s assets under management (AUM) crossed a cool ₹64 lakh crore. This growth is largely due to the popularity of systematic investment plans (SIPs) amongst retail investors and a growing awareness of long-term investing. More people are now turning to mutual funds for better, relatively safer gains, but figuring out how much you earn isn"t always as simple as it seems.
Knowing the real picture of our investments and returns is important, particularly in an SIP, where your investments happen at different times. That’s where the Extended Internal Rate of Return (XIRR) comes in.
In this post, we’ll explain what XIRR means for you as a mutual fund investor, how it helps make sense of your returns, and why knowing this metric can bring more clarity to your financial decisions.
XIRR in mutual funds adjusts for the timing and amount of each investment and withdrawal. It calculates a single annual return that reflects how your money has worked for you, considering each cash flow.
XIRR is one of the most accurate ways to evaluate investment returns for anyone who invests in mutual funds.
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Hypothetically, let’s say these are your transactions:
In this example, the calculated XIRR is 0.1583—or 15.8 percent—which reflects the annual return value from March 20, 2024, to April 7, 2025.
Conversely, CAGR works best when a single investment is made and held for a specific period. It calculates the annual growth and returns, assuming your investment grows steadily. The formula is:
CAGR = (Final value/Initial value) ^ (1/Number of years) - 1
While CAGR is simpler to calculate, it doesn’t reflect irregular cash flows like XIRR.
It is calculated using the formula:
Absolute return = [(End value - initial value)/Initial value] X 100
While absolute return can offer a quick overview of your investments, XIRR in mutual funds digs deeper and gives you all the compounding effects and transaction details over time.
XIRR can help you make mindful decisions by offering accurate insights on the rate of return while aligning with your specific financial goals. It also helps you better understand the risk-reward balance for your investment plans, such as short-term savings or retirement planning in a volatile market.
Accurate investment analysis: XIRR considers both the timing and amount of each investment. This is useful when money is added regularly, instead of all at once. You get a more accurate sense of your mutual funds" performance.
Comparing different investment styles: Whether you"re considering SIPs, lump-sum investments, or varying contribution amounts, XIRR considers all of them while evaluating returns. It adjusts for cash flow patterns so you can compare performance fairly and make better decisions.
Tracks overall portfolio performance: If you invest in multiple mutual funds with different cash flows, XIRR helps you to calculate the total return across your entire investment portfolio. This makes it easier to see if your diversification strategy is on track or needs adjustments.
Sensitive to errors: Even if one transaction date or amount is wrong, XIRR can show misleading results. It relies heavily on accurate data, and small slip-ups can make a big difference in calculating returns.
Complex metric: Compared to simple ROI and CAGR, XIRR is more technical. For someone new to mutual funds or SIPs, it might take a while to wrap their head around how XIRR works.
Analyses past data: XIRR calculates how your investments have performed so far but doesn’t predict what might happen next, especially during market fluctuations.
For example, if you increase your SIP amount when the market dips or pause it during a high, XIRR adjusts for that. It calculates returns based on every cash inflow and outflow, giving you an accurate value.
First Published: Jun 03, 2025, 16:43
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