{"id":11154,"date":"2025-12-09T11:07:22","date_gmt":"2025-12-09T11:07:22","guid":{"rendered":"https:\/\/goldenpi.com\/blog\/?p=11154"},"modified":"2026-01-12T08:03:06","modified_gmt":"2026-01-12T08:03:06","slug":"what-is-irr-internal-rate-of-return","status":"publish","type":"post","link":"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/","title":{"rendered":"What is IRR \u2013 Internal Rate of Return"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">When you invest money, you always want to know how much it can grow. But many investments give you money or \u201creturns\u201d at different times. Now, how will you measure the yearly return in this case?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s where the Internal Rate of Return (IRR) is used. It tells you the annual return after considering the timing of each cash inflow and outflow. Read this article to learn the <\/span><span style=\"font-weight: 400;\">IRR meaning<\/span><span style=\"font-weight: 400;\">, formula, and how it differs from CAGR and XIRR (Extended Internal Rate of Return).\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_79_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#What_is_the_Internal_Rate_of_Return\" >What is the Internal Rate of Return?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#1_Compare_Different_Investment_Options\" >1. Compare Different Investment Options<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#2_Set_Your_Personal_%E2%80%9CHurdle_Rate%E2%80%9D\" >2. Set Your Personal \u201cHurdle Rate\u201d<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#3_Evaluate_Long-Term_Investments_With_Irregular_Cash_Flows\" >3. Evaluate Long-Term Investments With Irregular Cash Flows<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#What_is_the_IRR_Formula\" >What is the IRR Formula?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#1_Every_Investment_Has_Cash_Flows_Over_Time\" >1. Every Investment Has Cash Flows Over Time<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#2_Money_in_the_Future_Is_Worth_Less_Than_Money_Today\" >2. Money in the Future Is Worth Less Than Money Today<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#3_IRR_is_the_Rate_At_Which_The_Total_Present_Value_Becomes_%E2%80%9CZero%E2%80%9D\" >3. IRR is the Rate At Which The Total Present Value Becomes \u201cZero\u201d<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#IRR_vs_CAGR_Whats_the_Difference\" >IRR vs CAGR: What\u2019s the Difference?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#How_is_IRR_Used_in_Mutual_Fund_Investments\" >How is IRR Used in Mutual Fund Investments?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#How_Does_XIRR_Differ_from_IRR\" >How Does XIRR Differ from IRR?<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#To_Understand_Better_Lets_Study_an_Example\" >To Understand Better, Let\u2019s Study an Example!<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#To_Conclude_IRR_is_the_Rate_at_Which_NPV_0\" >To Conclude, IRR is the Rate at Which NPV = 0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#Internal_Rate_of_Return_FAQs\" >Internal Rate of Return FAQs<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#Can_I_use_CAGR_for_computing_my_mutual_fund_SIP_returns\" >Can I use CAGR for computing my mutual fund SIP returns?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#How_to_calculate_IRR\" >How to calculate IRR?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/goldenpi.com\/blog\/investment-guide\/what-is-irr-internal-rate-of-return\/#What_do_you_mean_by_NPV_0\" >What do you mean by NPV = 0?<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_Internal_Rate_of_Return\"><\/span><span style=\"font-weight: 400;\">What is the Internal Rate of Return<\/span><span style=\"font-weight: 400;\">?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Internal Rate of Return<\/span><span style=\"font-weight: 400;\"> (IRR) is the rate of return a project or investment is expected to generate every year. It is the percentage at which:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The present value of future cash inflows\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">becomes \u201cequal to\u201d<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The initial investment or cash outflow<\/span><\/li>\n<\/ul>\n<p><i><span style=\"font-weight: 400;\">A<\/span><\/i><span style=\"font-weight: 400;\">s an individual investor, you can use IRR to judge whether an investment is worth your money and time. It tells you the \u201cannual return\u201d you can expect from an investment, based on the cash you put in (investment) and the cash you expect to get back in the future (the returns).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For more clarity, let\u2019s see how you can use IRR in different ways:<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"1_Compare_Different_Investment_Options\"><\/span><span style=\"font-weight: 400;\">1. Compare Different Investment Options<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">If you have multiple choices, such as a fixed deposit, a mutual fund SIP, real estate, or bond investments, the <\/span><span style=\"font-weight: 400;\">internal rate of return<\/span><span style=\"font-weight: 400;\"> allows you to compare them using a single number. Always remember that,\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Higher <\/span><span style=\"font-weight: 400;\">IRR<\/span><span style=\"font-weight: 400;\"> = higher annual return.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This knowledge allows you to select the option that grows your money faster.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"2_Set_Your_Personal_%E2%80%9CHurdle_Rate%E2%80%9D\"><\/span><span style=\"font-weight: 400;\">2. Set Your Personal \u201cHurdle Rate\u201d<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Usually, the concept of <\/span><span style=\"font-weight: 400;\">IRR<\/span><span style=\"font-weight: 400;\"> is used by companies, which compare it with a \u201churdle rate\u201d. As an individual investor, you can also do the same by setting your own hurdle rate. It could be:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The return you can earn from a safe alternative (like a fixed deposit or government bond)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">or<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The minimum return you expect for the risk you are taking<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Now, if an investment\u2019s IRR is above your hurdle rate, you may consider it. If it is below, you may reject it.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"3_Evaluate_Long-Term_Investments_With_Irregular_Cash_Flows\"><\/span><span style=\"font-weight: 400;\">3. Evaluate Long-Term Investments With Irregular Cash Flows<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Internal rate of return<\/span><span style=\"font-weight: 400;\"> is also used when your cash inflows or returns do not occur at the same time. This happens when you invest a lump sum once and then receive money over several years.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example,\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Let\u2019s say you invested \u20b95,00,000 in 2020.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">After that, the project or investment returns money to you every year in varying amounts:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">\u20b91,20,000 in Year 1<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">\u20b91,40,000 in Year 2<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">\u20b91,80,000 in Year 3<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">\u20b92,00,000 in Year 4<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">\u20b92,20,000 in Year 5<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Note that these cash flows are irregular and occur at different points in time.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Since each year\u2019s cash inflow has a different timing and duration, you cannot use CAGR (Compounded Annual Growth Rate).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><i><span style=\"font-weight: 400;\">Why?<\/span><\/i><span style=\"font-weight: 400;\"> That\u2019s because CAGR assumes a single cash inflow at the beginning and a single cash outflow at the end.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In such cases, IRR becomes the correct return measure.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">IRR considers:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The exact timing of each annual cash inflow<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">and<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The total amount you receive over the entire period.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This gives you the true annual return on your 2020 investment, based on \u201chow much money\u201d you received each year and \u201cwhen you received it\u201d.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_the_IRR_Formula\"><\/span><span style=\"font-weight: 400;\">What is the <\/span><span style=\"font-weight: 400;\">IRR Formula<\/span><span style=\"font-weight: 400;\">?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">To calculate the <\/span><span style=\"font-weight: 400;\">internal rate of return<\/span><span style=\"font-weight: 400;\">, you may use the following formula:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">0 = <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">0<\/span><span style=\"font-weight: 400;\">+ <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">1<\/span><span style=\"font-weight: 400;\">(1 + IRR)<\/span><span style=\"font-weight: 400;\"> +<\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">2<\/span><span style=\"font-weight: 400;\">(1 + IRR<\/span><span style=\"font-weight: 400;\">)<\/span><span style=\"font-weight: 400;\">2<\/span><span style=\"font-weight: 400;\"> + <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">3<\/span><span style=\"font-weight: 400;\">(1 + IRR<\/span><span style=\"font-weight: 400;\">)<\/span><span style=\"font-weight: 400;\">3<\/span><span style=\"font-weight: 400;\">&#8230;&#8230;&#8230;&#8230;&#8230;+ <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">n<\/span><span style=\"font-weight: 400;\">(1 + IRR<\/span><span style=\"font-weight: 400;\">)<\/span><span style=\"font-weight: 400;\">n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Where:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">0<\/span><span style=\"font-weight: 400;\"> = Initial investment<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">1<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">2<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">3<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">n<\/span><span style=\"font-weight: 400;\"> = Future cash inflows or outflows<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">n = Specific time period<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">N = Total number of periods<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">NPV = Net Present Value<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This formula tells you that IRR is the discount rate that makes the Net Present Value (NPV) equal to zero. Let\u2019s see how it happens:<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"1_Every_Investment_Has_Cash_Flows_Over_Time\"><\/span><span style=\"font-weight: 400;\">1. Every Investment Has Cash Flows Over Time<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">At the beginning, you spend money, which is represented by <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">0<\/span><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Later, you receive money depicted as <\/span><span style=\"font-weight: 400;\">CF<\/span><span style=\"font-weight: 400;\">1<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">2<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">3<\/span><span style=\"font-weight: 400;\">, CF<\/span><span style=\"font-weight: 400;\">n<\/span><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"2_Money_in_the_Future_Is_Worth_Less_Than_Money_Today\"><\/span><span style=\"font-weight: 400;\">2. Money in the Future Is Worth Less Than Money Today<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Now, considering the time value of money, each future cash flow is divided by <\/span><span style=\"font-weight: 400;\">(1+IRR<\/span><span style=\"font-weight: 400;\">)<\/span><span style=\"font-weight: 400;\">n<\/span><span style=\"font-weight: 400;\">.<\/span><span style=\"font-weight: 400;\">This \u201cdiscounts\u201d the future amounts back to today\u2019s value. For example:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A cash flow in Year 3 is divided by <\/span><span style=\"font-weight: 400;\">(1+IRR<\/span><span style=\"font-weight: 400;\">)<\/span><span style=\"font-weight: 400;\">3<\/span><span style=\"font-weight: 400;\">, because it occurs three years from now.<\/span><\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"3_IRR_is_the_Rate_At_Which_The_Total_Present_Value_Becomes_%E2%80%9CZero%E2%80%9D\"><\/span><span style=\"font-weight: 400;\">3. <\/span><span style=\"font-weight: 400;\">IRR <\/span><span style=\"font-weight: 400;\">is the Rate At Which The Total Present Value Becomes \u201cZero\u201d<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Now, the formula finds the rate at which the present value of all future cash inflows becomes exactly equal to the initial investment. At that rate:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Present value of inflows = Initial investment<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This makes NPV (net present value) = 0<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"IRR_vs_CAGR_Whats_the_Difference\"><\/span><span style=\"font-weight: 400;\">IRR vs CAGR<\/span><span style=\"font-weight: 400;\">: What\u2019s the Difference?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">CAGR (Compounded Annual Growth Rate) measures the \u201caverage annual growth rate\u201d of an investment. It assumes:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You invested all your money on one single day\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">and<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Withdrew it on one single day (at some later point in time)<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">CAGR only works when there is one cash inflow (at the start) and one cash outflow (at the end). In contrast, IRR handles multiple cash flows, whether they are investments or returns, happening at different times. It calculates the actual annual return by considering the timing and amount of every cash flow.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For more clarity, let\u2019s check out the <\/span><span style=\"font-weight: 400;\">IRR vs CAGR<\/span><span style=\"font-weight: 400;\"> detailed comparison:<\/span><\/p>\n<div class=\"pcrstb-wrap\"><table>\n<thead>\n<tr>\n<th><span style=\"font-weight: 400;\">Factor<\/span><\/th>\n<th><span style=\"font-weight: 400;\">CAGR<\/span><\/th>\n<th><span style=\"font-weight: 400;\">IRR<\/span><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><span style=\"font-weight: 400;\">Meaning<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Average annual growth rate between the starting value and the ending value<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Annual return that makes NPV = 0 by accounting for every cash flow<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Cash flow pattern considered<\/span><\/td>\n<td><span style=\"font-weight: 400;\">One-time investment and one final value<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Multiple cash inflows and outflows\u00a0<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Considers the Time Value of Money?<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Yes, but only for start and end values<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Yes, for every individual cash flow<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Good for SIPs or staggered investing?<\/span><\/td>\n<td><span style=\"font-weight: 400;\">No<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Yes<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Ideal for long-term investments with irregular cash flows<\/span><\/td>\n<td><span style=\"font-weight: 400;\">No<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Yes<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Complexity of calculation<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Low<\/span><\/td>\n<td><span style=\"font-weight: 400;\">High (usually requires a financial calculator or spreadsheets)<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/div>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"How_is_IRR_Used_in_Mutual_Fund_Investments\"><\/span><span style=\"font-weight: 400;\">How is IRR Used in Mutual Fund Investments?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">When you invest in mutual funds via SIPs (Systematic Investment Plans), your money is invested in the market:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">On different dates\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">and<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In different amounts<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Now, again, because of this irregular timing, mutual fund returns cannot be measured with CAGR. Instead, the industry uses <\/span><span style=\"font-weight: 400;\">XIRR<\/span><span style=\"font-weight: 400;\">, which stands for \u201c<\/span><span style=\"font-weight: 400;\">Extended Internal Rate of Return<\/span><span style=\"font-weight: 400;\">\u201d and is a modified version of IRR. It is a method used to calculate your actual annual return when:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You invest money on different dates<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The amounts vary<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You redeem units on different dates.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_Does_XIRR_Differ_from_IRR\"><\/span><span style=\"font-weight: 400;\">How Does<\/span><span style=\"font-weight: 400;\"> XIRR<\/span><span style=\"font-weight: 400;\"> Differ from <\/span><span style=\"font-weight: 400;\">IRR<\/span><span style=\"font-weight: 400;\">?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Internal rate of return works only when cash inflows (investments) or outflows (returns) are at fixed + equal time gaps. For example, you put money once a year and receive money once a year. The timing is predictable.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In contrast, XIRR is used when money moves on different dates, and the timing is uneven.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">For example, in SIPs and SWP (systematic withdrawal plans), you invest or redeem on different days. This is why mutual funds use XIRR, not IRR.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"To_Understand_Better_Lets_Study_an_Example\"><\/span><span style=\"font-weight: 400;\">To Understand Better, Let\u2019s Study an Example!<\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Assume you invest \u20b95,000 every month through a SIP. Each \u20b95,000 goes into the mutual fund on a different date. When you finally redeem the investment, the value you receive depends on the NAV at that time.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, <\/span><span style=\"font-weight: 400;\">XIRR<\/span><span style=\"font-weight: 400;\"> looks at:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Every SIP instalment and its exact investment date<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">and<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The final redemption amount and redemption date<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Lastly, it calculates your annual return. So, if your XIRR is 12%, it means your SIP investment actually earned 12% per year, after considering every date and every instalment separately.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"To_Conclude_IRR_is_the_Rate_at_Which_NPV_0\"><\/span><span style=\"font-weight: 400;\">To Conclude, <\/span><span style=\"font-weight: 400;\">IRR<\/span><span style=\"font-weight: 400;\"> is the Rate at Which NPV = 0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">So now you know that IRR is the rate at which the \u201cpresent value of all cash inflows\u201d becomes equal to the \u201cpresent value of all cash outflows\u201d. And when you subtract the two, the Net Present Value (NPV) is always zero.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">IRR is widely used when an investment involves multiple cash flows over time (at equal time gaps). This metric also has a modified version called \u201c<\/span><span style=\"font-weight: 400;\">XIRR<\/span><span style=\"font-weight: 400;\">\u201d, which allows you to enter the exact dates of each cash flow. This makes it more accurate for SIPs, staggered investments, redemptions, or any situation where money is invested or withdrawn irregularly.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you are looking for fixed-income investment options, you may <\/span><a href=\"https:\/\/goldenpi.com\/corporate-bonds\"><span style=\"font-weight: 400;\">visit the GoldenPi platform<\/span><\/a><span style=\"font-weight: 400;\">. Here you can explore AAA- or AA-rated bonds, corporate FDs from leading small finance banks and NBFCs, and even apply to the latest NCD IPOs.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Internal_Rate_of_Return_FAQs\"><\/span><span style=\"font-weight: 400;\">Internal Rate of Return<\/span><span style=\"font-weight: 400;\"> FAQs<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"Can_I_use_CAGR_for_computing_my_mutual_fund_SIP_returns\"><\/span><span style=\"font-weight: 400;\">Can I use CAGR for computing my mutual fund SIP returns?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">No. CAGR assumes a single investment made on one date and redeemed on one date. Since SIPs involve multiple investments on different dates, each instalment has a different holding period. In such cases, XIRR is the correct method to measure SIP returns.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_to_calculate_IRR\"><\/span><span style=\"font-weight: 400;\">How to <\/span><span style=\"font-weight: 400;\">calculate IRR<\/span><span style=\"font-weight: 400;\">?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">To calculate IRR, list all cash inflows and outflows with their timing. Next, set NPV to zero, and find the return rate that balances them. Usually, the calculation of IRR is performed using tools like Excel\u2019s IRR\/XIRR function or a financial calculator.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_do_you_mean_by_NPV_0\"><\/span><span style=\"font-weight: 400;\">What do you mean by NPV = 0?<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">NPV = 0 represents the present value of all future cash inflows exactly equals the initial investment. At this point, the investment neither creates nor loses value. The discount rate that produces this zero balance is the Internal Rate of Return (IRR).<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">_______________________________________________________<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Disclaimer:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.<\/span><\/p>\n<p><script type=\"application\/ld+json\">{\"@context\":\"https:\/\/schema.org\",\"@type\":\"FAQPage\",\"mainEntity\":[{\"@type\":\"Question\",\"name\":\"Can I use CAGR for computing my mutual fund SIP returns?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"No. CAGR assumes a single investment made on one date and redeemed on one date. Since SIPs involve multiple investments on different dates, each instalment has a different holding period. In such cases, XIRR is the correct method to measure SIP returns.\"}},{\"@type\":\"Question\",\"name\":\"How to calculate IRR?\",\"acceptedAnswer\":{\"@type\":\"Answer\",\"text\":\"To calculate IRR, list all cash inflows and outflows with their timing. Next, set NPV to zero, and find the return rate that balances them. 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But many investments give you money or \u201creturns\u201d&hellip;<\/p>\n","protected":false},"author":8,"featured_media":11385,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"categories":[26],"tags":[89,866,867],"class_list":["post-11154","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment-guide","tag-goldenpi-blog","tag-irr","tag-rate-of-return"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Internal Rate of Return Explained | Meaning, Uses, Suitability, and More<\/title>\n<meta name=\"description\" content=\"Made a lump sum investment and will get returns over several years? Calculate your annual return using the Internal Rate of Return. 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