Basic terms you MUST know to CORRECTLY analyze your Investment portfolio - Part 1

Investments are made to earn profits. And there are different ways to represent returns from an investment. Let's talk about absolute return and XIRR (aka CAGR) today -

Let's study this with an example -

Suppose you invested Rs. 1 Lakh in 2010 and it's value in 2015 is Rs. 1.5 lakhs (ie, in 5 years)

In this case,

• Absolute Return = 50% (does NOT take into account the time period since you are invested)

• XIRR = 8.4% p.a. (takes into account the time period since you are invested). That means, every year, you have earned a return of 8.4%. In simpler terms, in 2011, you earned INR 8,400/- (1 lakh 8.4%); 2012 you earned INR 9,105.6/- [(1 lakh + 8,400) * 8.4%] and so on to reach 1.5 lakhs in 2015.

Formula for calculating both the returns -

• Absolute return = ((Current value of the investment/ Initial investment) – 1) * 100.

• XIRR = ((Ending value/ Beginning value) ^ (1/n)) – 1; where n = tenure of the investment

What to use when?

If you've been investing since

1. Less than 1 year - Use absolute return

2. More than 1 year - Use XIRR

We at Nivesh Mitr, strongly believe, that every investor should be an "educated and informed investor" and these are our small steps towards attaining that.

If we can help you invest, reach us on -

Email: Arpita@NiveshMitr.com

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