XIRR

Most investors do not put in one lump sum and leave it. They add money over time, sometimes withdraw, and the amounts differ each time. A simple "start value versus end value" return cannot describe that experience.

XIRR can. It is the single annual rate at which all of the investor's contributions, made at their actual times, would have grown to the ending value. The workbook describes it as refining the traditional IRR by assigning specific dates to each cash flow, making it more accurate for real-world investments.

Where TWRR tells you how good the manager was, XIRR tells you what the investor actually earned, including the effect of when they chose to put money in and take it out.

The workbook's example (Chapter 10, section 10.1.2). An investor contributes at the start of each year:

Total contributed ₹75,000; ending value ₹1,05,920. Solving for the rate that equates the contributions with the terminal value:

5,000 = −10,000/(1+r) − 15,000/(1+r)² − 20,000/(1+r)³ − 25,000/(1+r)⁴ + 1,05,920/(1+r)⁵

gives XIRR = 15.15%. The workbook's definition: XIRR is the annual rate of return at which the cumulative contributions grow over the measurement period.

Regulatory use (Chapter 8, section 8.8). When reporting performance to an investor, the portfolio manager presents the investor's XIRR for each investment approach invested in, accompanied by the minimum, maximum and median XIRR across all investors in that approach. The approach's TWRR and the benchmark's trailing return are shown separately, with a disclaimer that the investor's performance may differ because of (a) the timing of inflows and outflows and (b) differences in portfolio composition because of restrictions and other constraints.

Use the workbook's own numbers to see why XIRR and a simple return disagree.

Simple view. ₹75,000 in, ₹1,05,920 out: a gain of ₹30,920, or 41.2% on total contributions. It sounds like a great five years — but it ignores that most of the money went in late.

XIRR view. The first ₹5,000 was invested for five years, but the last ₹25,000 for only one. Weighting each contribution by the time it was actually invested gives 15.15% a year.

Now the PMS report. Suppose this investor holds a mid-cap investment approach alongside 400 other investors. Her quarterly report shows (the comparison figures are illustrative):

She sits above the median. Her XIRR is below the approach's TWRR because she added her largest amounts in the later years — exactly the "timing of inflows and outflows" the mandatory disclaimer warns about.

Chapter 10 (Performance Measurement and Evaluation, 10%), section 10.1.2, and Chapter 8 (Operational Aspects, 13%), section 8.8, which cites SEBI circular SEBI/HO/IMD/IMD-PoD/P/CIR/2022/172 dated 16 December 2022. Expect questions on what XIRR accounts for (irregular, dated cash flows), what accompanies it in investor reports (minimum, maximum and median across investors in the approach), and the text of the disclaimer.

• XIRR is for the investor's own performance; TWRR is for the investment approach. The single most tested contrast.
• XIRR is affected by the timing of the investor's cash flows; TWRR is not.
• Investor reports show min, max and median XIRR across all investors in each approach — not the average.
• Do not divide total gain by total contributions (41.2%) — that ignores time.
• The workbook's worked example uses year-start contributions, so it behaves like an annual IRR. The distinguishing feature of XIRR in the definition is that each cash flow carries its own specific date.
• The disclaimer names two reasons for differences: timing of flows and portfolio composition differences from restrictions and constraints.