What is this terminology called XIRR? Can you walk us through this terminology and how do you understand it as an SIP investor in the mutual fund industry?
You need to understand what total returns are. When you invest in something, you earn returns. It is pretty straightforward when it comes to deposit. You deposit on a specific date and for a specific term you get a return. It is easy to compute because the investment is done on a specific date and you take your money out on a given date in future.
Likewise, in case of mutual fund SIP, when you start your SIP for Rs 1000, you continue investing this amount every month in future. So your first SIP is invested for the full period, your next month's SIP is invested for a month less than the full period and so on. Computing returns for these investments becomes difficult. For this, you need to calculate returns for varying amounts of investments done at irregular points in time which is called internal rate of return. There is a formula for that which helps you calculate it.
The equivalent formula for calculating it in Microsoft Excel, which is a very popular spreadsheet tool that most people use, is XIRR. It is used for calculating internal rate of return for a cashflow for a series of investments done at different periods of time. Hence, it is popularly referred to as XIRR. So it is nothing but rate of return earned for varying amounts of money invested for different periods.