Thanks. So NAV method is the only correct approach then to calculate portfolio performance.
I donāt think itās that simple, unfortunately, like I explained above.
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Hi Krishnaraj
You are right that numbers have to be interpreted in detail. However compared to other methods I have found this better as it does not take into account the actual invested amount which as you pointed out correctly can skew some results, and purely looks at price action /NAV changes.
Taking your example as of July 01, 2001, annualized returns show as 21%. Now what actually increased by 21% CAGR on July 01, 2001?.-Original Rs 100 became 110 (+10%) in six months as NAV increased from 10 to 11 (+10%). The additional 100000 have not yet starting yielding anything on purchase date. Thus resulting in portfolio value of 100110.
End of year, if this additional fund was not added, the 100 would have turned into 121 by 01 Jan 2002. ie annualized 21%.
Thus I use the NAV and related CAGR only to accept that the returns are āequivalentā to ācompounded annualized returnsā.
Also realized that I had not considered the change in NAV based on bonus. rows 10 and 11. See green shaded cells.
Because the new price is 400 (row 10)- it is actually 4001.4 (Bonus of 16 for 40 =40%) considering the original NAV of 10. Similarly row 11 price is now 10001.4. Both these result in NAV increasing and thereby the new CAGR becomes 26% (L11). Updated sheet attached.Stock NAV calc Sample-Sachin.xlsx (12.8 KB)
Thanks and Regards
Sachin
Thanks Sachin,
As long as we are aware of the caveats! In many informal conversations when folks say that āI have been generating some āxā CAGR on my portfolioā it may not mean what we think.
Also another thought is that the CAGR approach may have a better meaning for ābuy and holdā for a fixed amount of investment and may be to a lesser extent for a fixed amount SIP method.
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Absolutely, though a regular income earner investing in SIP may want a measure of performance. Maybe he or she should look at performance only for a year and beyond to minimise the quirks. But even a simple measure of capital gains / losses over the capital outlay will give a sense of how much money he has really made. He needs to adjust it for time and that is tricky. Maybe a capital weighted time duration could be used.
I take seriously returns only on capital laid out for more than a year. Another option is to take the risk free equivalent of any mid year capital infused at the beginning of the year. So returns on any mid year capital is its risk free returns from the beginning of the year till then and whatever it has earned from investment till year end.That way you do not fool yourself into thinking into higher returns on small ticks.
Hi Guys,
Valueresearch Portfolio Manager shows %PA. Has anybody tried it?
Regards,
Ramesh
Just remembered someone mentionedā¦many years back ā¦that once the sell amount was greater than the purchase amount (invested capital), subsequent gains on remaining quantity would be at zero or -ve cost thus resulting in āinfiniteā returns.
Purchase Qty:100, Rate 10, Purchase Amount =1000
Sell Qty 50, Rate 20, Sale Amount =1000
Thus remaining 50 shares are now āfreeā and thus would yield infinite returns on capital as well as even if stock price went to 0, I would still have not lost my capital.
Any comments?
Somehow the NAV method doesnāt seem to be correct always. Consider this scenario.
1st JAN 2014 Initial capital 100Rs, NAV = 10 so units =10
1st JAN 2014 purchase 10 shares of company X and Rs 10
1st Nov 2014 share price of X becomes 10 times i.e 100 so NAV = (100*10/10) = 100, Units =10
1st Nov 2014 fresh capital added 1Lac Rs so new units issued = 1,00,000/100 = 1000 (Total units = 1010)
1st Nov 2014 buy 1000 shares of X (Total shares of X = 1010)
1st JAN 2015 share price of X doubles and becomes 200 so new NAV = (1010 200 / 1010) = 200*
That means from 1st JAN 2014 to 1st JAN 2015 my nav became from 10 to 200 which is 1900% CAGR which is not true picture of my performance.
Major chunk of my purchase was done at NAV of 100 which became 200
What matters is how many units were purchased at what price so eventually you have to do cash in and cash out XIRR calculation for the units purchased and sold.
Please let me know if I am misunderstanding anything.
Thanks
The calculation seems correct. You may be stumped by the high CAGR, but what you may be ignoring that you have doubled your money in 2 months (between 1-Nov-14 and 1-Jan-15). That itself is a stupendous CAGR (around 6300% if I am not mistaken). It is getting tempered down because you had a low allocation for the rest of the year.
Hi Abhishek/Other Valuepickr friends
Could you please comment on my post dated Sept 22nd.
Regards
Sachin
That was an excellent share Harsha. I have been trying to do this for months now and had not fully completed it yet as got stuck in between. So I understand the amount of time you have put in this. Your sheet is of tremendous help.
Have a quick question. In the holdings sheet, I notice there are two columns āMan. Priceā & āLast DPUā they seem to be edited manually, can you please provide details on those columns ?
Actually I tried checking around to see what it could be. Although I couldnt correlate āMan. priceā to anything. I felt āLast DPUā could be last divident per unit. however I tried cross checking it with the transactions sheet and with actuals in money control, none of them correlated. Will you please help.
I use Man. Price in the rare cases when google finance quotes are not working. As the name says it is manual price. When google finance quote is not available price is picked from this.
Last DPU is dividend per unit as you guessed. I did not tie it to transactions because there will be scenarios where u enter a stock in middle of year. So dividend details for the first half of year will not be available in your transactions sheet. So i left it to be a manual entry. I like checking the dividend yield at CMP. so use this column for that.
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NAV method gives you time weighted returns (TWR). XIRR gives you money weighted return (MWR). Difference comes from timing and size of cashflows. XIRR and NAV returns are same when there are no cashflows between beginning and ending period. If there are cashflows between beginning and ending periods, XIRR and NAV methods will give you different returns.
NAV based returns are independent of cashflows. i.e. NAV returns does not change even if there are large or small cashflows in the portfolio. This is the correct way for mutual funds to calculate their returns as they do not control when investors buy or sell MF units. Returns reported by Mutual Funds are TWR returns.
MWR returns take into account timing and size of cashflows hence they are called Money Weighted Return. MWR is the actual return an investor earns as it considers both the amount and timing of the actual money invested.
Both methods require you to value your portfolio at regular intervals and on all days there is a net cash inflow or outflow in the portfolio. Mutual Funds do it on a daily basis as they have cashflows on a daily basis. For individuals, a monthly valuation is easy as your DP will send you a monthly holding statement that will have market value of your portfolio at end of the month. Interestingly, you donāt need to record your buys and sells as all your trades will be eventually reflected in the closing value of your portfolio and cash balance.
long term TWR is generally considered as return to strategy (or strategy return) as it is the return you are likely to get if you continue to apply the same strategy in the long term.
MWR return is the actual return investor earn as it takes into consideration timing and size of cashflows.
Both methods will allow you calculate returns over any period as long as you have beginning and ending value of your portfolio (including cash) and all cashflows and their dates.
Since MWR return take into consideration timing and size of cashflows, it is a good indicator of asset allocation and market timing skills of the investor while TWR is a good indication of stock selection and portfolio construction skills.
If MWR returns for a period are less than TWR returns for the same period then investorās market timing skills are not good as it indicates investor is generally buying after a positive return and selling after a negative return. Similarly if MWR returns for a period are higher than TWR returns for the same period then investor has superior market timing skills as it indicates investor is generally adding cash to portfolio just before a positive return and taking cash out just before a negative return.
Quiet often mutual fund earn a good return (TWR) but investors in mutual fund earn a lower return (MWR) as they are generally bad at timing the market.
If you have been following a strategy for a number of years, you should calculate both TWR and MWR returns. TWR is the return you are likely to earn if you continue to follow your current strategy in the long term. If your MWR return is less than TWR, then you should try to improve your asset allocation (aka market timing) skills as It indicates that although you have a good stock selection strategy, you are unable to invest correct amount of money in your own strategy.
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I find this useful,
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Sir Can you provide NAV based calculation on Google Sheet? Its difficult for us to make it from scratch.