Lately, while going through my mutual fund investments, I found out my overall returns from my mutual fund’s portfolio are 4.51%. My portfolio has a mix of funds ELSS mutual funds, debt mutual funds and index investments.
I felt disappointed, considering the fact I have been invested for 3 years. Then I found another metric below as “XIRR of 10.14%” in my mutual fund investment app.
Personal Experience with XIRR
I was going through this fintech platform advertisement, projecting 13% XIRR returns, which sounded exciting. But I just had a closer look at investments and returns.
Below are the investment details.
| Particulars | Value |
|---|---|
| Total Invested Amount | ₹94,777.72 |
| Received Amount | ₹1,10,447.32 |
| Investment Period | 30 months |
Based on the details, I found, this investment offers, 16.53% of absolute returns which looks great, but found the CAGR is 6.31%. I am disappointed with the CAGR of the investment offering, which is lower than the fixed deposit, yet, the XIRR of 13% left me speechless.
What is XIRR?
XIRR (Extended Internal Rate of Return) is one of the best metrics to measure your returns especially when your investments and withdrawals are irregular from your investment.
For example, if you invest ₹50,000 today and ₹25,000 six months later, XIRR includes the gap between these investments to provide a more accurate annualized return.
What is XIRR in Mutual Funds?
XIRR is a more precise way to evaluate mutual fund returns. With your mutual fund investments, you invest through SIP, sometimes add lumpsum investment because of opportunity and do some withdrawal from your mutual fund.
To examine your returns, considering the date of your investment, investment horizon, and your withdrawals, XIRR is the best metric for your mutual fund portfolio performance.
Is 13% XIRR a Good Return? What is Good XIRR?
I tried looking at what is a good XIRR number to achieve, but I can’t any data suggesting a good XIRR number. But historically, CAGR for Equity is 12% and Debt Mutual is 6%-7%.
Over the short term (<1 Year) XIRR number could be misleading, with very high around 50% and sometimes even more.
But over the long term, even if someone tries to capture the bottom of the crash, XIRR is not much diverted from the CAGR growth.
So, XIRR For Equity Funds: 15% – 20%
XIRR For Debt Mutual Funds: 6% – 8% in line with the CAGR estimates.
But for other direct debt bond investments or mixed products on fintech platforms offers 10% to 14% XIRR. But also, it’s important to note their CAGR growth often falls in the range of 6% – 8% only.
Note: XIRR also depends on the frequency of payments and tenure
FAQ
What is XIRR in SIP?
Generally, XIRR returns in sip are better than lump sum investments because of rupee-cost averaging during the volatile markets. But there is no evidence to prove it.
What are the best XIRR Mutual Funds to invest in?
No, mutual fund investment projections can be given in CAGR terms, but not in XIRR terms as XIRR involves multiple investments and withdrawals over time, it varies from person to person, a better XIRR numbers show your ability to time the market better. Apart from that there are not any best XIRR Mutual funds to invest in.
Can you invest based on XIRR Returns?
No, Equity schemes can’t guarantee any XIRR returns. You can estimate your XIRR returns when there is a fixed date and a fixed amount of payment on that date. Not even with debt mutual funds.
But for Debt schemes like Bonds or Lease opportunities that have fixed monthly payout or quarterly payout over a fixed period, you can have a clear XIRR return estimate. But need to note their CAGR is different and far lesser than the XIRR shown.
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