Limitations of XIRR
1. Requires Precise Cash Flow Data: The date and amount of each cash flow, as well as precise and comprehensive cash flow data, are necessary for XIRR. The accuracy of the XIRR estimate may be impacted by missing or erroneous data.
2. Sensitive to Small Changes in Data: The cash flow data’s slightest modifications might have an impact on the XIRR, making it a sensitive indicator. Due to this, comparing several investments or deciding only on the basis of the XIRR return may be challenging.
3. May Not Be Suitable for All Investment Types: Investments with erratic cash flows, like real estate or private equity, are best suited for XIRR. Bonds and annuities are examples of investments that might not be suitable.