Answers to a frequently asked questions on investment returns.
1. What return does the moneycontrol portfolio manager calculate?
It calculates the absolute return. That is the percentage difference = (value-investment)/investment.
This does not represent how your money has compounded. Ignore it. Use Value Research portfolio manager to get XIRR returns (a measure of compounding when there are multiple investments) or my portfolio tracker (link on the right) for mutual funds which would allow you to continuously track financial goals.
2. What return does Value Research use in its fund listings?
Returns less than 1 year are absolute returns. Above 1 year, annualized returns (CAGR) are listed.
3. How can I calculate XIRR for my mutual fund or stock holdings?
You will need to enter every transaction ever made! So collect that information and use this simple XIRR calculator.
4. How much return can I expect from my equity investments over the long-term?
In the investor workshops, I show that over a 15 year period, the average return is about 14% but with an error (standard deviation) of 4%. So 68 times out of 100, returns can swing from (14-4 = 10%) to (14+4 = 18%). Which is why I plan all my long-term goals with 10% equity only. You are free to choose whatever number you want, but be mindful of the volatility.
Note to those who understand what a normal distribution is: so far, Sensex returns can be reasonably approximated with a normal distribution. Hence, the notions of standard deviation and average are still valid ... so far.
5. What return should I use in a financial goal calculator?
What is your debt allocation? What is your equity allocation? ..... (for other asset classes)
What post-tax return do you expect from each asset class?
If I expect 6% post-tax return from debt (40% allocation) and 10% post-tax return from equity (60% allocation), the approximate return to be used in the goal calculator =
(6% x 40%) + (10% x 60%) = 8.4%.
Do not make the mistake of using only equity returns!!
6. Do I include the tax saved while calculating returns from ELSS funds, PPF etc.?
NO! What you save matters little to your net worth, unless you invest it!. If you do invest it, it is going to be factored in any way.
7. What is the difference between, CAGR, IRR and XIRR?
Please see: Compounding With Volatile Returns: CAGR vs. IRR
8. How do I make sense of volatility in returns? (Not a FAQ. It should be!)
Have written several posts on this. A short selection:
- Debt Mutual Fund Returns: How to expect when you are expecting!
- Evaluating Volatility in Returns
- Understanding Volatility of Investment Returns with a Portfolio Rebalancing Simulator
- How to select mutual fund categories suitable for your financial goals
- How to Select Debt Mutual Funds Suitable For Your Financial Goals?
I draw a blank here. Can you add to this list? If you have questions on investment returns, ask away. I will do my best to answer them.
If you have friends or relatives in Delhi who you think could benefit from this workshop, please forward this link to them.
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