Two return percentages can describe different questions about the same set of investments. CAGR summarises growth between two values across a period. XIRR accounts for the dates on which cash enters or leaves the investment being measured.
The distinction becomes visible when you add money during the year. An increase in portfolio value then contains both your contribution and the investment's gain or loss. Treating the whole increase as a return mixes those two amounts.
A single investment and CAGR
CAGR means compound annual growth rate. For a single initial investment with no later contributions or withdrawals, the formula is ending value divided by beginning value, raised to one divided by the number of years, minus one.
In a fictional example, ₹1,00,000 becomes ₹1,21,000 over exactly two years. The calculation is (₹1,21,000 ÷ ₹1,00,000) raised to one half, minus one. The answer is 10% a year.
That 10% is a constant annual rate that connects the two values mathematically. The portfolio did not necessarily earn 10% in each individual year. One year could have been negative and the other positive. A starting and ending value cannot describe the path between them.
CAGR also differs from absolute return. The total increase here is ₹21,000, or 21% of ₹1,00,000. Reporting 21% as an annual return would replace a two-year period with a one-year period.
What changes after a second contribution
Consider a second fictional example. A portfolio receives ₹1,00,000 on 1 January 2025 and another ₹50,000 on 2 July 2025. Its value on 1 January 2026 is ₹1,62,447.29. There are no withdrawals or separate distributions in this example.
The money contributed totals ₹1,50,000. The gain over those contributions is ₹12,447.29. Dividing that gain by ₹1,50,000 produces about 8.30%, but the later ₹50,000 was invested for only 183 days. It did not spend the full year in the portfolio.
Using only the opening ₹1,00,000 would be worse. The resulting increase of about 62.45% would count the additional ₹50,000 as investment performance.
How XIRR uses dates
XIRR finds an annual rate that reconciles the amounts and dates of cashflows. In the second example, using a 365-day year gives an XIRR of approximately 10%. The calculation accounts for the shorter time available to the July contribution.
Microsoft's XIRR function uses dated cashflows with at least one positive and one negative amount. From the investor's perspective, contributions are negative cashflows and money received is positive. An ending market value is entered as a hypothetical final receipt for the measurement date. That entry values the remaining holding without pretending a sale actually happened.
Cashflow boundaries need to stay consistent. A dividend paid out of the measured portfolio is a receipt. A dividend retained inside a portfolio whose total value already includes the cash must not also be counted as money withdrawn from that same portfolio.
A percentage needs a measurement description
A comparison requires the same period, currency, cashflow boundary and treatment of fees. A return in rupees and a return converted into another currency answer different questions. Missing dates or a duplicated contribution change the calculation even when every share price is correct.
XIRR is a measurement of the supplied cashflows. It does not predict the next year's return or establish that one investment suits a particular person. Unusual sequences of inflows and outflows can also produce calculation difficulties.
FinTarget's analytics documentation explains its charts and financial-year summaries. FinTarget does not currently calculate XIRR. Its portfolio gain figures and historical values should therefore be read according to their own definitions rather than labelled as an XIRR result.