A mutual fund's internal rate of return (IRR) is a figure that describes its performance. A fund with a relatively high IRR produces greater dividends. Some investments, such as bonds use a simple coupon or interest rate to describe such performance. This is impossible with a mutual fund because its cash flow varies over time with market performance. The IRR instead is the hypothetical compounded interest rate that could earn an initial investment the same returns that the mutual fund produces. You can't calculate this rate using direct mathematics, but it can be calculated using a spreadsheet or a dedicated program.
1. Launch an internal rate of return calculator.
2. Type the amount that is invested in the mutual fund in the cash flow box.
3. Add a negative sign to this investment value, which indicates that it is an outgoing cash flow. For example, if you invest $10,000 in a the mutual fund, enter the value as -10000.
4. Type the returns that the mutual fund produces on successive lines. For example, assume that the fund produces returns of $1,350, $1,950, $2,590 and $3,000. You would then type "1350," "1950," "2290" and "3000."
5. Select the payment period interval from the relevant drop-down box. If the mutual fund produces returns annually, select "Yearly."
6. Click "calculate." The internal rate of return for the mutual fund used in the example is 15.48 percent.
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