How XIRR can help you become richer?

What is XIRR?

• IRR in XIRR stands for Internal rate of Return

• X- Stands non uniform cash flows

• XIRR is a mathematical formula which gives the Annualized Return on Investments

• XIRR is the most important information regarding investments

• All decisions with respect to Investments must be taken after knowing the XIRR

How to calculate XIRR?

• What is need to calculate XIRR?

– Dates on which investments were made

– Amount of Investment made on each date

– Final Value or current Estimated value of Investments

– Watch the following video on how XIRR is calculated.

Let’s use XIRR to Calculate

• Money Back Policy

– 16 Year Term for Sum Assured Rs 1 lakhs

– 15% Money back after every 3rd, 6th, 9th, 12th year

– Balance 40% on Maturity at the end of 15th year

– In addition there is also accumulated bonus Rs 900 per thousand* (expected) at the time of maturity

• The word expected to be noted very carefully

– Annual Premium : Rs 9350/=

• Calculating Returns

– Step 1 : Write down cash flows out and in with dates

• 1.1.2013 -9350

• 1.1.2014 -9350

• 1.1.2015 -9350

• 1.1.2016 -9350+15000 = +5650

• 1.1.2017 -9350

• 1.1.2018 -9350

• 1.1.2019 -9350+ 15000 = +5650

• 1.1.2020 -9350

• 1.1.2021 -9350

• 1.1.2022 -9350+15000 = +5650

• 1.1.2023 -9350

• 1.1.2024 -9350

• 1.1.2025 9350+15000 = +5650

• 1.1.2026 -9350

• 1.1.2027 -9350

• 1.1.2028-9350

• 1.1.2029 40000+90000= 130,000

Use Spreadsheet to calculate XIRR

Return of 4.11% - as good as a Savings bank account

One More e.g.

• Endowment Policy

– 30 Year Term

– Sum Assured : Rs 5 lakh

– Annual Premium : Rs 15,680

– On Maturity after 30 years amount to be received 2 times Sum assured

– What is the return on this policy?

Return of 4.5% over 30 year period – again as good as savings account

One More e.g

• Insurance Term : 20 years

• Annual Premium : Rs 1 lakh

• No of Premiums : 10

• Maturity Value Rs 25 lakhs

• Rs 10 lakhs becomes Rs 25 lakhs – but, What is the return?

Return of 5.9%

Another e.g.• Gold Schemes

– 11 installments by us

– 1 installments by jeweler

• Returns

– 15.8%

• Where is the catch?

– No Cash back

– Must buy jewelry (not even gold coins why?)

– pay 21% towards wastage and making

– Net Return : -5%

Examples• Investment of Rs 20,000 in 2000 Current value Rs 1.2 lakhs

– Return ?

• Investment of Rs 20,000 in 1990 Current Value of Rs 2.4 lakhs

– Returns?

• Investment of Rs 20,000 in 1990 Current Value of Rs Rs 4.8 lakhs

– Returns ?

• Annual Premium : Rs 40,000 Number of Premiums paid : 8 Accumulated Value : Rs 4,00,000

– Returns?

• Annual Premium : Rs 30,000 Number of Premiums Paid : 3 Accumulated Value : Rs 75,000

– Returns ?

• Any live Cases ?

Does return matter?• Lets look at the examples we did just before

– Rs 20,000 invested in 1990 becoming Rs 2.4 lakhs in 2013

– Rs 20,000 invested in 1990 becoming Rs 4.8 lakhs in 2013

– Returns

• In first case : 11.4%

• In second case : 14.8%

– Amount invested is same, but the maturity value is double

– Difference in Return : 3.4%

– Just 3.4% return can double our wealth in 23 years

– What could have happened if you have invested

• In RD giving 8% return instead of Money back policy giving 4%

• In FD giving 9% return instead of Endowment Policy giving 4.5%

• Investing Rs 1 lakh per year in FD giving 9% return rather than policy giving 5.9%

• Returns matter a lot and let’s not make mistakes in calculating returns on our Investment

How much return are you making?

• Calculate the returns on property Investments?

• Calculate the returns on Insurance?

• Calculate the Returns on Mutual Funds?

• Do it now

• Do it today evening

• But, Don’t keep it for tomorrow

Is there a scope to improve returns by 3% without increasing Risk, so we can double our wealth?

• 3% improvement in XIRR can double wealth

• 6% improvement in XIRR can make us rich by 4 times

• 9% improvement in XIRR can make us rich by 8 times

• Where is the scope to increase XIRR?

– Buy Online Insurance Only

– Invest in Gold not in Jewelry

– Invest in Second hand property where you are sure how much carpet area is available (In the new flats what is shown in the drawing is always different from what is given finally)

– Buy Mutual funds online

– Re-evaluate Direct Investments in Equity