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Monday 1 November 2010

Measuring Portfolio Performance - Do it like a mutual fund

There is an old Chinese saying which says "what cannot be measured cannot be improved". I have thought about how I invest in the markets. As I get a monthly salary, I tend to put money into the markets also in monthly tranches. After a while it is difficult to measure the returns that I have got from my portfolio as a whole and not from individual stocks. All the websites that are out there that I have used does not really give a true picture of portfolio performance because it tracks the current holding and provides the percent gain or loss. I looked at various softwares, websites and did not find anything that actually helps me in doing this. So, I built a rudimentary spreadsheet in Microsoft Excel which helps me track my portfolio as a mutual fund on a NAV basis.

If you want you can use a similar concept. The concept is fairly simple and straightforward. The initial amount you start off with, say, Rs 1000 is your initial capital. Take an arbitrary face value (I chose 10 more out of convention, you could take 1 or 100 or whatever number takes your fancy). The number of "portfolio units" you allocate yourself are calculated by the total portfolio value divided by the face value (in this case, 1000/10=100 units).

Once you have the basic framework in place, it becomes easier from here. Every time you put money in your stock account, just calculate the number of "portfolio units" you would get. For example, if your initial capital of Rs1000 has grown to Rs 1200, your NAV would be 1200/100=12 (portfolio value divided by units equal new NAV). So, if you add Rs 60 to your portfolio, you will get 60/12=5 more units. So, you will have 100+5 units. So, your portfolio would be now 105*12=1260.

Keep track of a benchmark index if you are interested to know if your stock picking skills are good enough for you to continue at it. Over a period of time (not less than 3 years) if you are not doing better than the index, it is probably better to get out of managing your funds and hand it over to a mutual fund or an exchange traded fund (ETF).

1 comment:

  1. Dear Abhishek,

    Thank you very much for sharing you valuable knowledge..