XIRR vs IRR: The Complete Guide with Examples
Both calculate returns, but they handle time differently. Here's everything you need to know.
The Core Difference
IRR (Internal Rate of Return) assumes cash flows happen at regular intervals (monthly, yearly, etc.).
XIRR (Extended IRR) uses exact dates for each cash flow, making it accurate for real-world investments.
📊 IRR
Internal Rate of Return
- • Cash flows must be equally spaced
- • Uses period numbers (1, 2, 3...)
- • Common in corporate finance
- • Excel:
=IRR(values)
📈 XIRR
Extended Internal Rate of Return
- • Cash flows can be on any date
- • Uses exact dates
- • Perfect for investments
- • Excel:
=XIRR(values, dates)
Example 1: When IRR Works
Suppose you invest ₹10,000 at the start of each year for 3 years:
| Period | Cash Flow |
|---|---|
| Year 0 | -₹10,000 |
| Year 1 | -₹10,000 |
| Year 2 | -₹10,000 |
| Year 3 | +₹40,000 |
IRR = 15.74% annually
IRR works here because investments are exactly 1 year apart.
Example 2: When You Need XIRR
Now let's say your investments happened on actual dates:
| Date | Cash Flow |
|---|---|
| 15-Jan-2021 | -₹10,000 |
| 20-Mar-2021 | -₹10,000 |
| 05-Sep-2022 | -₹10,000 |
| 30-Dec-2023 | +₹40,000 |
XIRR = 17.82% annually
The XIRR is higher because ₹10,000 invested in Sep 2022 had less time to grow (only ~15 months vs 3 years for the first investment).
⚠️ If you used IRR here...
IRR would assume equal yearly spacing and give you 15.74% — understating your true return by over 2%!
The Formula Behind XIRR
XIRR solves for the rate r in this equation:
Σ (Cash Flowi) / (1 + r)(daysi/365) = 0
Where:
- Cash Flowi = Amount invested (negative) or received (positive)
- daysi = Days between this cash flow and the first date
- r = The annual return rate (what XIRR calculates)
When to Use Which?
| Scenario | Use IRR | Use XIRR |
|---|---|---|
| SIP investments | ❌ | ✅ |
| Lump sum held for years | ✅ | ✅ |
| Stock trading (multiple buys/sells) | ❌ | ✅ |
| Project with monthly payouts | ✅ | ✅ |
| Real estate with irregular rent | ❌ | ✅ |
🎯 Rule of Thumb
If your cash flows happen on specific dates (which is almost always true for personal investments), use XIRR. Only use IRR when cash flows are perfectly periodic.
Common Misconceptions
❌ "IRR and XIRR give the same result if periods are equal"
Almost, but not exactly. IRR returns a per-period rate, while XIRR always returns an annual rate. If periods are monthly, you'd need to annualize IRR.
❌ "XIRR is more complex, so I'll just use IRR"
XIRR is actually easier when using Excel or tools like TrueXIRR—just enter amounts and dates. IRR requires you to structure data into equal periods first.
❌ "My broker shows returns correctly anyway"
Most brokers show simple returns or CAGR, not XIRR. They often ignore the timing of your investments completely.
Summary
- IRR = For equally-spaced cash flows (monthly, yearly)
- XIRR = For real-world investments with specific dates
- XIRR is more accurate for SIPs, trading, and any irregular investments
- When in doubt, use XIRR—it works for all cases
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