Measuring individual portfolio performance against the benchmark indices
Very often people are happy booking
small time 15-20% profits in individual stocks and hold on to the laggards with
losses in the hope that something good will happen.
It is essential to monitor and measure
the portfolio against a set benchmark, in order to justify your own performance relative to the market.
After all, if you are unable to beat the benchmark indices you
are way better to invest in an index fund or Exchange traded fund (ETF) rather
than investing in equities yourself.
Most retail investors are clueless when it
comes to portfolio growth rate or performance. They buy so much, sell so much
and received bonus/splits/dividends everything is lost in this mess.
So here’s a simple excel based approach
which will help you to measure your portfolio performance vis-à-vis the chosen
benchmark and give you a ready reckoner of your performance.
Part 1:
Let’s get started. You are all excited
and you start your journey in the big bad world of stocks with a corpus of Rs 1
Lakh. Suppose the date is 31st March, 2012. So you being the fund manager, you issued yourself 10,000 units of your fund (let’s call it
stock_pf) at a NAV of Rs 10.
Date
|
31-Mar-12
|
Units
|
10000
|
NAV
|
10.00
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend
amount |
1
|
Cash
|
100,000
|
100,000
|
||||
2
|
|||||||
TOTAL
|
100,000
|
100,000
|
Part 2:
Now you are all geared up for your
first purchase, so the very next day you go and purchase the bank where you
have been banking for the last decade. Let’s say this is HDFC bank in your case. On 1st April, 2012 HDFC Bank was quoting at Rs 520 per share. You
went ahead and bought 100 shares at Rs 520 each. So here’s how your portfolio
will look now.
Date
|
1-Apr-12
|
Units
|
10000
|
NAV
|
10.00
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend amount
|
1
|
HDFC Bank
|
52,000
|
100
|
520
|
520
|
52,000
|
|
2
|
Cash
|
48,000
|
48,000
|
||||
TOTAL
|
100,000
|
100,000
|
So you used up Rs 52,000 cash in making
a purchase and cash has been reduced by the same amount. For simplicity we are
ignoring the transaction charges. Your invested value should be inclusive of
all such charges (brokerage, service tax, STT, other charges). Invested value
divided by No. of shares will give your cost per share.
Part 3:
So a couple of months have passed,
markets are down and you decided it’s time to add another stock to your
portfolio. Your visit to the local Tanishq shop left you highly impressed and
you decided on buying Titan Industries for your portfolio. So on 5th
June, 2012 you bought some Titan for your portfolio. Titan was quoting at Rs
205, so you bought 230 shares. Here’s how your fund stock_pf looks now.
Date
|
5-Jun-12
|
Units
|
10000
|
NAV
|
9.81
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend
amount |
1
|
HDFC Bank
|
52,000
|
100
|
520
|
501
|
50,100
|
|
2
|
Titan Indus
|
47,150
|
230
|
205
|
205
|
47,150
|
|
3
|
Cash
|
850
|
850
|
||||
TOTAL
|
100,000
|
98,100
|
Notice that the NAV has dipped below
10.00 meaning you are in a loss in tandem with the market. And after the two
purchases you are left with only Rs 850 in cash.
Part 4:
On 28th June, 2012 HDFC Bank
paid dividends to its shareholders. So you too received some cash inflows. So
the amount Rs 4.3 per share for 100 shares amounted to Rs 430 cash credit, this
being a cash inflow gets added to the cash part.
Date
|
28-Jun-12
|
Units
|
10000
|
NAV
|
10.58
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend amount
|
1
|
HDFC Bank
|
52,000
|
100
|
520
|
548
|
54,800
|
430
|
2
|
Titan Indus
|
47,150
|
230
|
205
|
216
|
49,680
|
|
3
|
Cash
|
1,280
|
1,280
|
||||
TOTAL
|
100,430
|
105,760
|
Part 5:
Similarly on 16th July, 2012
you received some part profits from your other company Titan Industry which
again contributes in boosting your NAV by adding on to the cash component of
the portfolio. Here the payout is Rs 1.75 per share for 230 shares amounting to
Rs 402.50
Date
|
16-Jul-12
|
Units
|
10000
|
NAV
|
11.07
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend amount
|
1
|
HDFC Bank
|
52,000
|
100
|
520
|
582
|
58,200
|
430
|
2
|
Titan Indus
|
47,150
|
230
|
205
|
221
|
50,830
|
402.5
|
3
|
Cash
|
1,682.5
|
1,682.5
|
||||
TOTAL
|
100,832.5
|
110,712.5
|
Part 6:
Now that the markets are on a high you
decided to take some profits of the table. So on 21st September,
2012 you decided to sell some of your HDFC bank shares. HDFC Bank was quoting
at around Rs 620 per share, much higher than your buy price. So you decided to
sell 30 shares for a consideration of Rs 620 per share, resulting in Rs 18,600
of cash inflows.
Date
|
21-Sep-12
|
Units
|
10000
|
NAV
|
11.91
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend amount
|
1
|
HDFC Bank
|
36,400
|
70
|
520
|
620
|
43,400
|
430
|
2
|
Titan Indus
|
47,150
|
230
|
205
|
241
|
55,430
|
402.5
|
3
|
Cash
|
20,282.5
|
20,282.5
|
||||
TOTAL
|
103,832.5
|
119,112.5
|
Note like in the buy case, your sale
value should be exclusive of all sell charges (brokerage, service tax, STT,
demat charges, others etc.). Total sale value net of these is realized and
added to cash.
Part 7:
So finally amidst all this buy sell and
dividends, 6 months have passed. So you finally decided to pit your portfolio
against the benchmarks. Note down the latest portfolio on the given date
(October 3rd, 2012)
Date
|
3-Oct-12
|
Units
|
10000
|
NAV
|
12.33
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost per share
|
Current Price
|
Present Value
|
Dividend amount
|
1
|
HDFC Bank
|
36,400
|
70
|
520
|
620
|
43,400
|
430
|
2
|
Titan Indus
|
47,150
|
230
|
205
|
259
|
59,570
|
402.5
|
3
|
Cash
|
20,282.5
|
20,282.5
|
||||
TOTAL
|
103,832.5
|
123,252.5
|
So you have done quite well, in about 6
months your portfolio has returned 23% odd percent. But standalone returns are
meaningless unless you compare them with the benchmark. So here’s the
comparison.
31-Mar-2012
|
3-Oct-2012
|
Growth
|
|
Sensex
|
17,404
|
18,870
|
8.42%
|
Nifty
|
5,296
|
5,731
|
8.21%
|
Portfolio NAV
|
10.00
|
12.33
|
23.25%
|
Voila! You were able to beat both the
Sensex and Nifty hands down with your 2 stock portfolio and in the process
generated 23.25% returns for yourself.
So in effect the NAV based measurement
gives you a direction how you are performing vis-à-vis the market moves. It is
critical that your overall portfolio is beating the benchmarks; a sudden gain in
a couple of stocks and large losses in others is of no benefit to you at the
end of the day.
Thus if one is unable to beat the
benchmarks or average mutual fund returns over a period of time,
then he would be better off leaving direct investments in equities and should
choose diversified mutual funds for investing his hard earned cash.
Happy Investing!
Additional parts based on reader comments: 9th Oct 2012
Additional parts based on reader comments: 9th Oct 2012
Part 8: Adding fresh funds to the portfolio
As
readers pointed out this is of critical importance for salaried employees to
know how to fit in fresh capital into the portfolio. So let us suppose you plan
to put in additional Rs 50,000 into the portfolio on 3rd Oct.
So
since the current NAV for your portfolio is at 12.33 you are issued new units
at this rate. Hence 50000/12.33 = 4055.15 units are issued over and above the existing
10,000 units. Also the fresh capital of Rs 50,000 is added on to the cash
balance of the portfolio.
Hence
the portfolio looks like the following:
Date
|
3-Oct-12
|
Units
|
14055.20
|
NAV
|
12.33
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost/ share
|
Current Price
|
Present Value
|
Dividend
amount
|
1
|
HDFC Bank
|
36,400.0
|
70
|
520
|
620
|
43,400.0
|
430
|
2
|
Titan Indus
|
47,150.0
|
230
|
205
|
259
|
59,570.0
|
402.5
|
3
|
Cash
|
70,282.5
|
70,282.5
|
||||
TOTAL
|
153,832.5
|
173,252.5
|
Part 9: Withdrawing funds from the portfolio
Similarly if one wants to
withdraw any funds for other investments /consumptions
equivalent amount of
units will be reduced from the portfolio.
Suppose
you want to withdraw Rs 15,000 for making a tax saving fixed deposit as you
realize bank rates are going to get reduced soon and you need to rush.
Hence
the portfolio looks like as follows.
Date
|
3-Oct-12
|
Units
|
8782.96
|
NAV
|
12.33
|
||
Sl. No.
|
Name of Stock
|
Invested Value
|
Shares held
|
Cost/ share
|
Current Price
|
Present Value
|
Dividend
amount
|
1
|
HDFC Bank
|
36,400.0
|
70
|
520
|
620
|
43,400.0
|
430
|
2
|
Titan Indus
|
47,150.0
|
230
|
205
|
259
|
59,570.0
|
402.5
|
3
|
Cash
|
5,282.5
|
5,282.5
|
||||
TOTAL
|
88,832.5
|
108,252.5
|
So
note that irrespective of any additional capital input/withdrawal the NAV won’t
change on that given date. Only the total units and cash component will rise
(additional capital) or fall (capital withdrawal). Also dividends payout is the case when your cash increases without an increase in units.
Put in
your queries/comments if you need additional clarifications on any part.
Would it make sense to include sensex-delinked indices (such as FD rates etc) as benchmarks to pit against? If the markets were to remain stagnant for a few years -- think Japan -- and if one's portfolio were to be up just a few % points above sensex and nifty over that time, it might be misleading to conclude that the investing process is a sucess just because the nifty and sensex were trumped. If FD rates during that window were a stable 9% or thereabouts, we'd need to have beaten that too. Isn't?
ReplyDeleteHi SR,
ReplyDeleteThe purpose of equity investments is ideally for the longer term. Although it may appear that fixed income instruments have done phenomenally well over equities in the last 5 years, that is more of an anomaly than a norm.
Secondly, the tax treatment is critical. A 9% FD return taxed at the highest 30% bracket corresponds to post tax returns of 6.3% insufficient to beat average inflation of 7%. So real interest rate is - 0.7% and in effect one is seeing a loss of capital in terms of purchasing power.
Equities are the only avenue which have over longer periods gave returns beating the headline inflation, or in other words real effective returns. Indian markets has on an average returned 15%+ over the longer term.
So if again 10000 is invested the the number of units we wil be getting will be 1000 or 10000/12.33 units???
ReplyDeleteHi SAIBAOT,
ReplyDeleteIf you invest additional Rs 10,000 new units will be added to it at the present NAV. Hence your units will go up by 811.03
Thanks for mentioning this. Will add this scenario to the post too.
Thanks Rudra. I still find it hard to get convinced that equities alone will trump inflation in the long run. It's not easy to forget what's happening to a huge economy like Japan. Currently, equities enjoy a favorable tax treatment in India but when the DTC kicks in, it might all even out. And who knows... real estate and gold might outpace equities.
ReplyDeleteAnyway, in the article, what you've outlined seems to be quite a nice way to quantitate investments. What would you say are the limitations / drawbacks of this approach?
Hi SR,
DeleteThe asset allocation is a key to long term wealth creation. One needs to seek a right balance between the following asset classes - cash, fixed income, real estate, equities, bullion (gold).
Also prior to any investment above, one needs to ensure he has
a) Sufficient life insurance for himself and family
b) Sufficient health insurance
c) Contingency fund comprising of 3-6 months average expenses in liquid fund/cash
d) Paid off tax-inefficient high rate loans like Personal loans, credit cards etc.
Only when the above has been satisfied should one consider investments with a right mix of asset allocation.
What I have pointed out is a way to only analyze your equity investments, and making sense of the bigger picture. The problem with retail investors are that they already have a high exposure to debt from EPF/Bank FDs and channeling all savings to one avenue is not wiser.
That's a holistic answer. Thanks also for reminding me that insurance takes precedence over investments. I had put my insurance planning on the backburner and will have to work on that now.
DeleteWhat you've outlined is certainly a neat way o quantitate equity investments. My lingering question is over what indices should it be benchmarked against.
Hi SR,
DeleteChoosing the benchmark primarily depends on the composition of your portfolio.
If you have only Giant Caps > 50,000 Cr Market Cap choose Sensex/Nifty.
Only large caps > 10,000 Cr Market cap choose BSE 100. Only Midcaps < 5000 Cr Market cap choose CNX Midcap, only small caps < 1000 Cr Market cap choose BSE Small Cap. A mix of midcap and large caps choose BSE 200 etc.
Based on the nature of portfolio you can choose to select different benchmarks over diff point of time. It is important to set the benchmark and actively beating the benchmark once selected.
Hi Rudra,
ReplyDeleteThis is one of major issue I face while making my portfolio. The issue is slightly more complex in my case. The initial investment is very low to begin with, and I keep on buying more equity as and when I have money and I find opportunity. In such case it requires slightly more complex approach to find the actual rate of return.
The approach I use is, to check how much gain/loss I did everyday wrt my invested capital, and add it to my total gain till yesterday. gTillToday = (1 + gTillYesterday)*(1 + gToday) - 1.
Now using this you can predict your expected annual gain, and the constancy of the same.
Hi Subash,
ReplyDeleteThe approach mentioned is the ones followed by mutual funds. The purpose of the method is analyze and monitor portfolio performance an ongoing basis and compare it with the underlying benchmark.
Predicting expected growth is a very futile exercise, however if one needs to know the annualized growth rate from cash outflows at different times resulting in the present corpus use the XIRR() function in excel for an accurate figure.