Absolute Return vs XIRR in Mutual Funds: Meaning, Formula, and Key Differences

If we talk about Absolute Return and XIRR meaning in mutual funds, both are methods used to assess the performance of a mutual fund investment. 

Absolute Return shows the percentage change in an investment’s value between two points in time. In contrast, XIRR (Extended Internal Rate of Return) measures the annualised (yearly) return by taking into account the amount and date of each cash flow.

As per general market understanding, Absolute Return is generally relevant for a single lump-sum investment where there are no intermediate cash flows. Whereas XIRR is potentially more suitable for SIPs, SWPs, and portfolios involving multiple investments or withdrawals.

Mutual fund returns can be calculated in different ways, such as XIRR, CAGR, absolute returns, and more. However, the correct return metric largely depends on how an investor invests in mutual fund schemes. 

• A lump sum investment made once and held for a particular period can be assessed differently from an SIP, where investments are made on multiple dates.
• Similarly, periodic withdrawals from a portfolio (under an SWP) might require a different return method.

Using the wrong return metric can result in an “inaccurate calculation” of investment performance and may give an investor a misleading picture of the actual returns generated by the portfolio.

Don’t want that? Read this article to understand what are XIRR and absolute returns in mutual funds, how they are calculated, and where they are applicable.

Absolute return shows how much an investment has gained or lost in “percentage terms” over a particular period (without considering how long the money remained invested). It compares the initial investment with its current or final value. 

Mathematically, absolute return can be calculated using the following formula:

For example, 

• Suppose ₹1 lakh is invested in a mutual fund.
• Its value increased to ₹1.20 lakh.
• Now, the investment has earned a ₹20,000 gain (₹1.20 lakh - ₹1.00 lakh)
• The absolute return is 

Note that absolute return does not consider whether this 20% gain was earned over one year, three years, or five years. Therefore, it differs from annualised returns such as “CAGR” (Compounded Annual Growth Rate), which expresses the return on a yearly basis.

XIRR in mutual fund is a method used to calculate the “annualised return” of an investment when money moves in and out on different dates. For example, 

• Suppose an investor invested ₹10,000 in a mutual fund in January, another ₹10,000 in March, and ₹15,000 in July. 
• Later, the investor withdrew ₹40,000 in December. 
• Since each investment remained invested for a different period, the return cannot be calculated by simply comparing the total amount invested with the final amount.

In such cases, XIRR is an appropriate method. It considers the amount of every investment or withdrawal and the exact date on which it happened. Next, it calculates one annualised return that represents the performance of the entire investment over the period.

Generally, XIRR in mutual funds is used for SIPs, SWPs, and portfolios with multiple investments, withdrawals, or other cash flows.

XIRR in mutual funds can be calculated in any spreadsheet software (such as Microsoft Excel or Google Spreadsheets) by entering each investment or withdrawal along with its transaction date. 

The software then uses these cash flows and their dates to calculate the annualised return for the entire investment. The calculation requires at least:

• One negative value, representing money invested

and 

• One positive value, representing the current value or money received.

The formula used is “=XIRR(Values, Dates, [guess])”. Here, “Values” are the investment and withdrawal amounts. “Dates” represent the period during which these transactions took place. The “guess” is an optional estimate of the expected return and can usually be left blank.

Firstly, you are required to enter each “investment amount” in a separate row in one column. Since these amounts represent money paid into the investment (or cash outflows), enter them as negative values. For example, an investment of ₹10,000 should be entered as -10,000.

After entering the cash flows, you may follow these steps:

Step 1: Enter the Corresponding Dates

In the next column, enter the date of each investment. Each amount must have its corresponding transaction date.

Step 2: Enter the Current Investment Value

In the next row, enter the current value of the investment as a positive number. Enter the current date next to it. This represents the amount the investor would receive if the investment were valued or redeemed on that date.

Step 3: Apply the XIRR Formula

In another cell, enter “=XIRR(Values, Dates)”

Step 4: Select the Required Values and Dates

After typing “=XIRR(,” select the complete range containing the investment amounts. Add a comma, and then select the complete range containing their corresponding dates. Lastly, close the bracket and press Enter.

The spreadsheet software will now give the annualised return as a “percentage”, taking into account both the amount and the date of each cash flow.

Both Absolute Return and XIRR in mutual funds are methods used to measure investment performance, but they differ in how they account for the timing and duration of investments. 

Absolute return answers “How much has the investment gained or lost in total?” In contrast, XIRR answers 

• “What annualised return did the investment generate, considering when the money was invested and withdrawn?”

For more clarity, let’s check out a detailed comparison between absolute return and XIRR in mutual funds:

So, now you know about the absolute return and XIRR meaning in mutual funds. Both are return metrics, but their applicability differs based on how the investment is made. 

Absolute return is a “point-to-point” return metric that shows the total percentage gain or loss between the initial investment and its current or final value, without considering the investment duration. 

In comparison, XIRR in mutual funds calculates an annualised return by considering the amount and exact date of each cash flow. This makes it more suitable when money enters or leaves the investment at different points in time. 

For a lump-sum investment, absolute return might potentially be suitable for assessing the total gain or loss. Whereas, for SIPs, SWPs, and portfolios involving periodic investments or withdrawals, XIRR is generally more applicable because it accounts for the timing of each cash flow.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. What is XIRR meaning in mutual fund and how is it calculated?

XIRR is a return calculation used when a mutual fund has multiple cash flows occurring on different dates. It considers both the amount invested or withdrawn and the date of each transaction. 

Usually, XIRR is calculated using spreadsheet software through the formula “=XIRR(Values, Dates)”. It then gives the investment's annualised return.

2. What is XIRR in mutual fund, and how does it differ from absolute return?

Absolute return shows the total percentage increase or decrease in value, without considering the investment period. In comparison, XIRR calculates an “annualised return” based on the timing of cash flows. 

Generally, XIRR is considered more relevant when investments are made or withdrawn on multiple dates, such as through SIPs or SWPs.

3. What is CAGR in a mutual fund, and how is it different from XIRR?

CAGR represents the “annualised growth rate” of a lump-sum investment over a specific period. XIRR also provides an annualised return but accounts for multiple cash flows and their respective dates. 

Generally, CAGR is used for a single lumpsum investment, whereas XIRR is suited to investments with several investments/withdrawals.

An Investor Education and Awareness Initiative by Tata Mutual Fund. 

To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh 

Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’

All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login 

Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process. 

This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.