You bought a stock at Rs. 100 and it is now at Rs. 150. That is a 50% return, right? Well, yes -but that number alone can be deeply misleading. Whether it took you 6 months or 5 years to earn that 50% makes a massive difference to your real investment performance.
This is where XIRR comes in, and why Zarify uses it as the default return metric.
What Is a Simple Return?
A simple return (also called absolute return or total return) is the most basic calculation:
Simple Return = (Current Value - Invested Amount) / Invested Amount x 100
If you invested Rs. 200,000 and your portfolio is now worth Rs. 260,000, your simple return is 30%.
Simple, right? But here is the problem: it ignores time completely.
Why Time Matters
Consider two investors:
- Investor A earns 30% in 1 year
- Investor B earns 30% in 3 years
Both have the same simple return, but Investor A's money worked three times harder. If you are comparing your performance against a benchmark or a savings account, simple returns will mislead you.
Enter XIRR: Your True Annualized Return
XIRR (Extended Internal Rate of Return) calculates your annualized return while accounting for:
- The timing of each cash flow -Every buy, sell, and dividend has a specific date
- Multiple transactions -You probably did not invest everything at once
- The holding period -Converts your return to a per-year basis for fair comparison
A Practical Example
Suppose you made these transactions in a stock:
| Date | Transaction | Amount (Rs.) |
|---|---|---|
| Jan 1, 2025 | Buy | -100,000 |
| Apr 1, 2025 | Buy | -50,000 |
| Jul 1, 2025 | Dividend | +5,000 |
| Jan 1, 2026 | Current Value | +180,000 |
Your total invested is Rs. 150,000 and current value is Rs. 180,000 (plus the Rs. 5,000 dividend). A simple return calculation gives you:
(180,000 + 5,000 - 150,000) / 150,000 = 23.3%
But XIRR considers that the Rs. 50,000 second purchase was only invested for 9 months, and the dividend came in at a specific time. The XIRR for this scenario would be approximately 28.5% annualized -a meaningfully different (and more accurate) number.
When Simple Returns Mislead PSX Investors
Here are common scenarios where simple returns paint the wrong picture:
1. Averaging Down
If you bought a stock at Rs. 50 and bought more at Rs. 30, your average cost is somewhere in between. But a simple return on total invested ignores that your second, larger investment was made at a better price and for a shorter duration.
2. Partial Selling
You sell half your position at a profit, then the remaining shares drop. Simple return on remaining shares looks bad, but your overall XIRR accounting for the profitable sale may still be strong.
3. Dividend Reinvestment
When you reinvest dividends, you are making new purchases at different prices and times. XIRR handles this naturally; simple returns get confused.
4. Comparing Across Time Periods
A 15% return in 6 months is much better than 15% in 2 years. Only XIRR lets you compare them fairly.
How Zarify Calculates XIRR
In Zarify, XIRR is calculated automatically based on your transaction history:
- Every buy order is treated as a negative cash flow (money going out)
- Every sell order and dividend is treated as a positive cash flow (money coming in)
- Your current portfolio value is treated as a final positive cash flow at today's date
- The app then solves for the annualized rate that makes the net present value of all these flows equal to zero
You do not need to understand the math -just add your transactions and the app handles the rest.
The Bottom Line
Simple returns are fine for a quick glance, but if you are serious about understanding your PSX investment performance, XIRR is the metric that matters. It answers the most important question: "What annualized rate of return is my money actually earning?"
Zarify shows both metrics, but defaults to XIRR because it gives you the honest truth about your portfolio performance.
Track your true XIRR returns with Zarify -free for all Pakistan Stock Exchange investors.