A breakdown of XIRR (Extended Internal Rate of Return) and what each result means.
1. What is XIRR?
XIRR is the annualised return on a series of cash flows that don't happen on a single date. For a SIP, your installments are spread across many dates — each installment had a different amount of time to grow before maturity. XIRR is the single rate that, when applied to each installment over its individual time horizon, equates the total of those grown amounts to your maturity value.
It's the standard measure for SIP performance because regular CAGR (just maturity ÷ total invested, annualised) is misleading — it doesn't account for the fact that your last installment had only one month to grow while your first had three years.
2. The Core Math
XIRR is the rate r that satisfies:
Σ [ Cᵢ / (1 + r)(dᵢ − d₀)/365 ] = 0
Where Cᵢ is each cash flow (negative for installments, positive for the final redemption), dᵢ is the date of that flow, and d₀ is the first flow date. The equation has no closed-form solution — we solve it iteratively using the Newton-Raphson method, which converges in a handful of iterations for typical SIP scenarios.
3. Why Sign Matters
Each SIP installment is treated as an outflow (negative) from your perspective — money leaving your bank account. The redemption is an inflow (positive) — money coming back. The last row in the cash flow schedule combines the final SIP and the redemption into a single net cash flow.
4. XIRR vs Absolute Return
Absolute Return is just (Maturity − Invested) / Invested × 100. It tells you the total percentage gain over the whole period, but it doesn't distinguish between earning 25% in 1 year vs 25% over 10 years. XIRR annualises that and accounts for the timing of each contribution. Always compare investments using XIRR, not absolute return.
5. Tax on Gains
This calculator applies a flat 12.5% LTCG rate to the total gain (Maturity − Invested). This aligns with India's long-term capital gains tax on equity and equity-oriented mutual funds. Note: SIP tax in reality is calculated per installment based on each one's holding period — short-term gains (held under 1 year) are taxed at a higher rate. The flat 12.5% is a planning approximation.
Caveats & Disclaimer
For illustration only. Mutual fund investments are subject to market risk; past performance does not guarantee future results. The Newton-Raphson solver converges reliably for typical SIP scenarios but may fail for unusual cash flow patterns (e.g. mostly negative final values). Inflation assumptions are illustrative; India's long-term CPI varies. Consult a financial advisor for personalised guidance.
