What is IRR?
The Internal Rate of Return (IRR) is the annualised return that makes the present value of all cash inflows equal the present value of all cash outflows. Formally, it's the discount rate r such that:
Σ CF(t) / (1 + r)^t = 0
In plain English: IRR is the true annual return on an investment with uneven cash flows. It's the right metric when simple "total return" or "average return" would lie.
When to use IRR vs SIP/Lumpsum
- Pure SIP or pure lumpsum with a single maturity: use the SIP or Lumpsum calculator. IRR is overkill.
- Uneven cash flows: use IRR. Examples below.
Where IRR shines
Real estate:
- Year 0: −₹50 L (down payment + stamp duty + furnishing)
- Years 1–10: ₹20,000/month rent (minus maintenance) → ₹2,00,000/year
- Year 10: sell for ₹80 L → IRR tells you the true annualised return, factoring both rental income and appreciation.
Business investment:
- Year 0: −₹10 L investment
- Year 1: −₹5 L additional infusion
- Years 2–5: ₹3 L/year distributions
- Year 5: ₹15 L buyout → IRR gives the true return on your capital.
Insurance surrender comparison:
- Endowment policy: ₹50 K/year premium for 20 years, ₹15 L maturity → IRR tells you the actual return. (Usually 4–6% — worse than PPF.)
Portfolio with multiple additions and withdrawals:
- Initial ₹2 L, then ₹1 L added each year, then ₹50 K withdrawn in years 3 and 5. → IRR is the weighted-average annualised return.
Why average return is wrong
"My ₹1 L became ₹2 L in 3 years" sounds like ~33% per year. But it depends on when the money went in and came out.
If you invested ₹1 L at year 0 and received ₹2 L at year 3 → IRR ≈ 26% (compound).
If you invested ₹1 L at year 0, another ₹1 L at year 2, received ₹2 L at year 3 → IRR is very different.
Don't average; compute IRR.
How Newton-Raphson solves for IRR
There's no closed-form solution for IRR. Our calculator uses Newton-Raphson iteration:
- Start with a guess (default 10%).
- Compute NPV at that rate.
- Compute the derivative of NPV with respect to rate.
- Step toward the rate that makes NPV = 0.
- Repeat until the step size is negligible (~100 iterations max).
This converges fast for most real-world cash flow patterns. It can fail when there are multiple sign changes in the cash flow series (a theoretical property called "multiple IRRs") — the calculator returns null in that case. Add a "no result" if you hit this.
Common pitfalls
- Cash flow signs matter. Investments are negative; receipts are positive. If all signs are the same direction, IRR doesn't exist mathematically.
- Year 0 is today. Put the initial investment at year 0. Subsequent years are relative.
- Time gaps matter. A cash flow at year 5 is very different from one at year 2 — compounding works in years, not "total duration."
- Don't compare IRRs of different risk profiles. A 25% IRR on a single risky stock isn't comparable to 11% IRR on a diversified equity portfolio. Risk-adjust first.
IRR vs XIRR
Our calculator uses integer-year cash flows (simplifying assumption). Real investment platforms like Kuvera, Groww, INDmoney compute XIRR — the extended IRR that accepts exact dates.
For most planning purposes, year-level granularity is sufficient. If you need day-level precision (e.g., comparing two specific MF folios with SIP dates), use XIRR on the actual transactions via a spreadsheet or a portfolio tracker.
Frequently asked questions
Can IRR be negative? Yes, if total inflows are less than total outflows in present-value terms. A loss-making investment has a negative IRR.
What's a "good" IRR? Depends on the risk. For Indian equity portfolios over 15+ years, 11–13% is historical. For real estate, 6–10% is typical. For your business, whatever beats your next-best alternative with similar risk.
Can I compare IRR to my home loan rate? Yes — that's actually one of the best uses. If your home loan is 8.5% and you're considering prepaying vs investing in something that has IRR > 8.5% post-tax, investing wins mathematically.
What if Newton-Raphson doesn't converge? The calculator returns null and shows a hint. Check that you have at least one negative and one positive cash flow, and that the series isn't pathologically irregular.
