Mutual funds have become a popular choice for investors seeking to build wealth over the long term. Understanding how to accurately estimate mutual fund returns is crucial, and one essential metric for this is XIRR (Extended Internal Rate of Return).

When you make a lumpsum investment in a mutual fund, using CAGR (Compound Annual Growth Rate) is appropriate to estimate returns. However, in the case of SIP (Systematic Investment Plan) investments, which involve regular contributions made on specific dates, XIRR becomes more relevant since it accounts for the timing of each investment.

XIRR is preferred over CAGR when calculating SIP returns because CAGR only considers the initial and final values, ignoring the timing of each cash flow. XIRR takes into account various cash inflows and outflows to calculate the annual average return of each installment and adjust them to provide an overall average annual rate of return for all investments.

If you're utilizing an SWP (Systematic Withdrawal Plan), XIRR can also estimate total returns, allowing for regular withdrawals of a predetermined amount at fixed intervals. To better explain XIRR's accuracy, imagine a scenario where you initiate a monthly SIP of Rs. 10,000 in a mutual fund and continue it for 5 years, resulting in a maturity value of Rs. 8.84 lakh.

Each installment is invested over different periods, so their respective CAGR varies. Combining these into a single adjusted CAGR yields the XIRR for the mutual fund. Calculating XIRR in Excel is straightforward using the XIRR function. This involves recording transaction amounts and their corresponding dates. For instance, you might begin a SIP on January 10, 2023, and continue the same process monthly. By December 2023, with a maturity amount of Rs. 1,30,000, you can employ the XIRR function for accurate return calculation.

Follow these Excel steps for XIRR calculation:

• In column A, input transaction dates.
• In column B, record SIP amounts as negative values.
• Enter the redemption date alongside its amount positively.
• Use the XIRR formula: =XIRR(Values, Dates)*100.
• Calculate XIRR by selecting all values and dates ranges, then pressing enter.

Finally, for precise computations of SIP returns, consider using an online SIP calculator.