For the longest time I was debating whether to consider dividend reinvestment as a transaction in my XIRR calculations or not. Until now I never used dividend reinvestment in my XIRR. The reason was simple. If I did not sell and buy something (dividend reinvestment), then why should it be a transaction? But finally after some thought and a nudge from Value Research I decided to fix it.


Why do I have dividend reinvestment?

In the past I invested in liquid and ultra-short term mutual funds that used to offer dividends. This was a while ago around 2011 to 2015 or so I think. If I remember correctly, after much analysis, I arrived at the conclusion that dividends are better than growth for a person in the highest tax bracket. At the time, dividends were more tax efficient than incurring short term capital gains.


So instead of leaving my tactical investment amount in the bank, I kept it in dividend debt funds. When I felt the market was good to invest, I moved the money from the liquid fund to equity fund. The problem with this kind of investment is that the CAMS statement will have a lot of reinvestment transactions. These are due to the fund declaring dividends and immediately investing it.


Why not account in XIRR?

I always had a doubt as to what I should do with these transactions. When building the investment analysis app, I decided to exclude these transactions when calculating my XIRR. As I mentioned before, the reason was that I did not redeem or invest this amount, so why should it be part of XIRR calculations? I was of course being naive and did not even put any effort to learn the right way.


What changed my mind?

I have been reading about Value Research's investment analysis. I decided to give it a try (the free version). When I uploaded my CAMS statement, everything matched up with my investment analysis except for XIRR. And I know the reason. That got me to change my code and now dividend reinvestment is included as part of XIRR calculations.


How did it affect my numbers?

When ever I review my portfolio, I always feel like my XIRR is higher than what I expect. A XIRR of 12% does not just seem right to me. But I never really expected the dividend reinvestment to be the culprit. Now after the change, my XIRR is a bit lower now. Unfortunately I wrote some posts where I have been mentioning my returns wrongly. I don't want to change any of those now, but here are the corrections in the interest of full disclosure.


Correction in Follow-up to Virtual Meetup #5

I mentioned that my returns were 12% in May, 2021. But the actual number is 11.64%.

Correction in Year In Review – 2020 Returns

I mentioned my lifetime return as 11.75%, but it was actually 11.19% by the end of 2020.


Conclusion

I don't know if I mentioned my returns inaccurately in other posts. If I did, please accept my apology in misguiding you. It was totally unintentional. The good news is that going forward, the numbers will be more accurate!