IRR (Internal Rate of Return) is a common way to measure the annualized return of an investment, assuming cash flows occur at regular intervals (like monthly or annually). But real-life investments aren’t always so neat.
That’s where XIRR (Extended Internal Rate of Return) comes in — it allows for irregularly timed cash flows, making it a more precise and flexible metric for measuring actual investment performance, especially in private equity, real estate, or portfolios with variable contributions and distributions.
Key Differences:
- IRR: Assumes evenly spaced cash flows
- XIRR: Handles cash flows on specific dates (more accurate in real-world scenarios)
- Use Case: XIRR is typically preferred for client performance reporting or investment vehicles with unpredictable cash flow timing.
Understanding the difference is essential for accurately evaluating your portfolio’s true performance.
#Finterm #InvestmentReturns #XIRR #IRR #FinancialLiteracy
