So how is your portfolio doing?

Simple question, but very rarely does it get the real, correct, accurate answer.

So the conversation for a reasonably diligent client could be ..I invested about Rs. 10,00,000 2 years ago. The first year was bad and the market was down about 30% but last year was up by about 25%…so I guess i must be about 5% down.

Oops. Math.

Let us say invested in year 1 : 10,00,000

Year 2 down by 30%     so portfolio worth Rs. 700,000

Year 3 up by 25% so portfolio up to Rs. 875,000

So overall Mr. Investor you are down by about 12.5% over a 2 year period. Not 5%.

The other worry is people not knowing how much return they have got. They are happy with the fact that their fund is doing well. According to some websites like Morningstar or Valueresearch. Let us see the difference between investor returns and fund manager returns.

Let us assume that there are 2 investors who have invested as follows:

Priti                                              Kirti

Year 1 investment                                                 Rs. 100,000                                Rs. 50,000

Fund fell 30%                                                        Rs.   70,000                                Rs.  35,000

Withdrawal/Deposit

Priti withdrew & and K deposited Rs. 50k each  Rs. 20,000                             Rs. 85,000

Year 2 return, up 25% (end value)                         Rs. 25,000                             Rs. 106,250

Year 3 return, fund up 20%                                    Rs. 30,000                             Rs. 127,000

See fund performance vs investor performance?

So how should return be calculated?

Calculate the time weighted IRR to know what returns YOU have got in your investment. Kirti got lucky with her timing. When the markets were down she had less money put to work and when the markets were up she had more money put to work. Not some great strategy, just luck. Priti got 2 things wrong – she had more money at work when the markets went down and less money at work when the markets went up! double whammy. Surely if she had done a sip instead of trying to time the market (it just was that she had money, she was not really timing) she would have been better off. When she needed Rs. 50,000 in year 2 that money should have been in a debt fund or a bank fixed deposit. So that was Priti’s mistake number two. You should withdraw from equity only, and only when you see some irrationally high return. Never withdraw in panic or to pay your EMI.

This was not so much about market timing but about calculating your OWN correct return which can be very very different from the fund manager’s return.