It is said that measurement is the first step, that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it and goes without saying, you can’t improve it.

In this story, we will be talking about how you can measure your portfolio performance.


Let’s start with why should you measure your portfolio on a periodic basis?

Measurement of portfolio performance is an important part of an overall investment strategy. It helps the investors to understand whether their investments are taking them closer to their investment goals or further away from them.

It also tells investors whether they should change their strategy to achieve their goals.

So, how can you measure your portfolio?

Absolute performance

This is a measure of how much your total portfolio increased or decreased during a period. For example: if you had invested INR 1 lac in Jan 2018 and by the end of Dec 2018 it is worth INR 1.30 lacs, then your portfolio has increased by 30%.

Compound annual growth rate (CAGR)

CAGR shows at what annual compounding rate your investments are growing. For example: if you had invested INR 1 lac in Jan 2017 and by the end of Dec 2018 it is worth INR 1.45 lacs, then the CAGR of your portfolio is 20.42 %.

Relative performance

It is very important to use an appropriate basis of comparison because it gives a fair idea of the returns in general if you had invested in other opportunity.

The best index for comparison would be the Nifty 50 index that tracks the behavior of a portfolio of the largest and most liquid blue chip companies in Indian securities. Since it captures approximately 65% of its float-adjusted market capitalization, the Nifty 50 is a true reflection of the Indian stock market.

For example, if Nifty 50 gave a return of 2.2% between Jan-Dec 2018, but if your portfolio gave you an absolute return of 10%, your portfolio has outperformed by 7.8%.

How To Select The Right Method

Among all the above methods, CAGR offers the best measure for evaluating how your portfolio has performed over time i.e. when the time period is more than one year. CAGR helps fix the limitations of the arithmetic average return. But as you might be aware of, no investment moves in a strict linear path at all times specially during volatility. That’s the drawback of CAGR. It does not measure what happened to your portfolio in a particular year.

Wealth creation from equities is a long-term process. Some of your investment strategies may not work. In such a situation it makes sense to create a new strategy and move ahead. Just like a captain of a ship, it is your duty to measure your portfolio regularly to check if it is on course so that you can reach your financial destination safely and in a timely manner.