What is IRR?

IRR stands for Internal Rate of Return. It is a measure of investment return that takes into account the passage of time, and is related to NPV (net present value). Generally speaking, the higher an IRR, the better. IRR can sometimes be a useful tool for comparison, for example, comparing the performance of two different funds or indices, presuming you have IRR for each over identical time periods.

Note that IRR can fluctuate wildly due to the passage of time. A sudden markup in a investment portfolio will lead to a very high IRR reported immediately after this markup. With no material changes to the portfolio, but merely the passage of time, IRR reported at a later time will fall.

Mathematically understanding IRR requires understanding NPV. More detailed examination