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As per my understanding, if we invest the same amount in two different funds, the fund with the higher XIRR is always expected to generate more return compared to the fund with lower XIRR. The below calculation seems to be proving this wrong and I am not able to understand why.

Cashflow

Date Fund A Fund B
1-Jan-2020 100 100
1-Jan-2021 100 0
2-Jan-2022 100 0
3-Jan-2023 100 0
4-Jan-2024 100 0
4-Jan-2025 100 0
5-Jan-2026 100 0
6-Jan-2027 100 0
7-Jan-2028 100 0
7-Jan-2029 100 900
8-Jan-2030 (Withdrawing here) -1200 -1100

Summary

Fund Name XIRR Total Invested Total Gains
Fund B 4.662252547 1000 100
Fund A 3.280256454 1000 200

Fund A has generated higher returns but has a lower XIRR when compared to Fund B ? Aren't funds with low XIRR always supposed to generate lesser returns when compared to the ones with higher returns ?

PS: I got same XIRR values in both Google Sheets and Microsoft Excel.

vikkyhacks
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1 Answers1

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The difference has to do with the time value of money. You may also want to check out answers to this question: Can you explain "time value of money" and "compound interest" and provide examples of each?

From Microsoft's documentation for XIRR:

Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic.

The rate of return for Fund B over the whole period was indeed higher than in Fund A. The initial $100 investment returned about $58 over the ten years, while the initial $100 in Fund A returned only about $38.

But in your example, the additional investments over that first $100 had more time to grow and compound in Fund A. On the other hand, in Fund B, the additional investment had only one year to grow before everything was withdrawn. The higher rate of return had less to compound over time. In Fund A, the rate of return was lower, but it had a larger balance to compound for most of the life of the investment, therefore total returns were higher than in Fund B.

Matt S
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