How does Quicken handle money market fund interest income in IRR calculations?

tim.rohrer

I don't see any IRR values for a money market fund tied to an IRA even though they pay monthly interest. Why is this not included in IRR calculations for that security?

Tom Young

This is a "Mac" question that I can't really answer but I'm not sure I'm understanding your basic question.  Is the issue that Quicken for Mac doesn't calculate an IRR for the money market fund, which is suggested by your first sentence, or that IRR values are being calculated for the money market fund, but you don't see the "interest income" activity as part of the calculation, suggest by your second sentence?

An IRR calculation for a security comprises only money in, money out, and the ending value of the holdings.  So, in the Windows version of Quicken, you won't see reinvested dividends showing up in an IRR calculation because there's no net cash flow associated with that; the cash "flows in" with the dividend but immediately "flows out" with the new purchase of the security.  Where this kind of activity makes its mark in an IRR calculation is that they serve to increase the ending value of the holdings. 

If your money market fund pays interest (a dividend) and uses the interest to automatically buy more of the fund, that's exactly the same as a dividend reinvestment.

If the real issue is that the Mac version of Quicken doesn't calculate an IRR for a money market fund, that would seem to be a bug.

tim.rohrer

Thank you for the reply. I've done some additional testing and have determined the issue is that that the amounts being paid are apparently so small relative to the balance of the MMF that the IRR shows 0%.

I added a larger fake interest income (and reinvested it) and IRR appears to be calculating. The numbers don't change if I don't reinvest; I'm still researching if this is correct? My understanding is that if dividends/interest is not reinvested, they would be included in the final valuation in the calculation, but not as a cash flow.

Tom Young

"I added a larger fake interest income (and reinvested it) and IRR appears to be calculating."

Yes, a large chunk of interest income immediately reinvested on the same day won't show up as a viewable transaction on the IRR calculation but has its effect on the ending market value.

"The numbers don't change if I don't reinvest; I'm still researching if this is correct?"

I'm not sure what you're saying here, exactly.  Remember, the IRR calculation uses 4 things: beginning balance, cash in, cash out and ending balance.  If you're doing an IRR on an Account that only has the MM fund in it and you're saying that you pretend the interest is paid in cash and not reinvested, then yes, that won't affect the IRR number, (I'm assuming you're comparing it to the interest income/reinvest situation), because its effect on the ending market value is exactly the same as the interest income/reinvest situation since MM fund shares are almost always valued at $1/share.

tim.rohrer

"Yes, a large chunk of interest income immediately reinvested on the same day won't show up as a viewable transaction on the IRR calculation but has its effect on the ending market value."The numbers don't change if I don't reinvest; I'm still researching if this is correct?"I'm not sure what you're saying here, exactly.  Remember, the IRR calculation uses 4 things: beginning balance, cash in, cash out and ending balance.  If you're doing an IRR on an Account that only has the MM fund in it and you're saying that you pretend the interest is paid in cash and not reinvested, then yes, that won't affect the IRR number, (I'm assuming you're comparing it to the interest income/reinvest situation), because its effect on the ending market value is exactly the same as the interest income/reinvest situation since MM fund shares are almost always valued at $1/share."

My brokerage account includes MMF that automatically holds all the cash. So, if a stock pays a dividend and I take that as cash, that automatically gets put into the MMF (as a cash in). Quicken tracks IRR for each security.

When the MMF pays interest, that is recorded as a income interest and then I get another transaction line showing more shares of the MMF are purchased equaling that amount of the interest at $1/share.

So my question was really about the weighting of the transaction components if dividends/interest is reinvested. When reinvested, the ending balance is higher; when not reinvested, the cash out portion of the calculation is higher and earlier in the timeline. That is the part I'm not sure I understand regarding IRR calculations as they're done by Quicken.

I suppose I could create a spreadsheet and confirm things, but not sure the totals warrant that much time

Basically, I am trying to get a sense of the overall portfolio performance and I find it odd that Quicken doesn't count these as realized gains. Technically, I guess a MMF value could decline but if it is FDIC insured?