Measuring Portfolio Performance: The NAV based approach

Measuring individual portfolio performance against the benchmark indices

Very often people are happy booking small time 15-20% profits in individual stocks and hold on to the laggards with losses in the hope that something good will happen.

It is essential to monitor and measure the portfolio against a set benchmark, in order to justify your own performance relative to the market. 

After all, if you are unable to beat the benchmark indices you are way better to invest in an index fund or Exchange traded fund (ETF) rather than investing in equities yourself.

Most retail investors are clueless when it comes to portfolio growth rate or performance. They buy so much, sell so much and received bonus/splits/dividends everything is lost in this mess.

So here’s a simple excel based approach which will help you to measure your portfolio performance vis-à-vis the chosen benchmark and give you a ready reckoner of your performance.

Part 1:

Let’s get started. You are all excited and you start your journey in the big bad world of stocks with a corpus of Rs 1 Lakh. Suppose the date is 31^st March, 2012. So you being the fund manager, you issued yourself 10,000 units of your fund (let’s call it stock_pf) at a NAV of Rs 10.

Date	31-Mar-12		Units	10000		NAV	10.00
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	Cash	100,000				100,000
2
	TOTAL	100,000				100,000

 

Part 2:

Now you are all geared up for your first purchase, so the very next day you go and purchase the bank where you have been banking for the last decade. Let’s say this is HDFC bank in your case. On 1^st April, 2012 HDFC Bank was quoting at Rs 520 per share. You went ahead and bought 100 shares at Rs 520 each. So here’s how your portfolio will look now.

Date	1-Apr-12		Units	10000		NAV	10.00
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	520	52,000
2	Cash	48,000				48,000
	TOTAL	100,000				100,000

So you used up Rs 52,000 cash in making a purchase and cash has been reduced by the same amount. For simplicity we are ignoring the transaction charges. Your invested value should be inclusive of all such charges (brokerage, service tax, STT, other charges). Invested value divided by No. of shares will give your cost per share.

 

Part 3:

So a couple of months have passed, markets are down and you decided it’s time to add another stock to your portfolio. Your visit to the local Tanishq shop left you highly impressed and you decided on buying Titan Industries for your portfolio. So on 5^th June, 2012 you bought some Titan for your portfolio. Titan was quoting at Rs 205, so you bought 230 shares. Here’s how your fund stock_pf looks now.

Date	5-Jun-12		Units	10000		NAV	9.81
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	501	50,100
2	Titan Indus	47,150	230	205	205	47,150
3	Cash	850				850
	TOTAL	100,000				98,100

Notice that the NAV has dipped below 10.00 meaning you are in a loss in tandem with the market. And after the two purchases you are left with only Rs 850 in cash.

Part 4:

On 28^th June, 2012 HDFC Bank paid dividends to its shareholders. So you too received some cash inflows. So the amount Rs 4.3 per share for 100 shares amounted to Rs 430 cash credit, this being a cash inflow gets added to the cash part.

Date	28-Jun-12		Units	10000		NAV	10.58
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	548	54,800	430
2	Titan Indus	47,150	230	205	216	49,680
3	Cash	1,280				1,280
	TOTAL	100,430				105,760

Part 5:

Similarly on 16^th July, 2012 you received some part profits from your other company Titan Industry which again contributes in boosting your NAV by adding on to the cash component of the portfolio. Here the payout is Rs 1.75 per share for 230 shares amounting to Rs 402.50

Date	16-Jul-12		Units	10000		NAV	11.07
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	52,000	100	520	582	58,200	430
2	Titan Indus	47,150	230	205	221	50,830	402.5
3	Cash	1,682.5				1,682.5
	TOTAL	100,832.5				110,712.5

Part 6:

Now that the markets are on a high you decided to take some profits of the table. So on 21^st September, 2012 you decided to sell some of your HDFC bank shares. HDFC Bank was quoting at around Rs 620 per share, much higher than your buy price. So you decided to sell 30 shares for a consideration of Rs 620 per share, resulting in Rs 18,600 of cash inflows.

Date	21-Sep-12		Units	10000		NAV	11.91
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400	70	520	620	43,400	430
2	Titan Indus	47,150	230	205	241	55,430	402.5
3	Cash	20,282.5				20,282.5
	TOTAL	103,832.5				119,112.5

Note like in the buy case, your sale value should be exclusive of all sell charges (brokerage, service tax, STT, demat charges, others etc.). Total sale value net of these is realized and added to cash.

 

Part 7:

So finally amidst all this buy sell and dividends, 6 months have passed. So you finally decided to pit your portfolio against the benchmarks. Note down the latest portfolio on the given date (October 3^rd, 2012)

Date	3-Oct-12		Units	10000		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost per share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400	70	520	620	43,400	430
2	Titan Indus	47,150	230	205	259	59,570	402.5
3	Cash	20,282.5				20,282.5
	TOTAL	103,832.5				123,252.5

So you have done quite well, in about 6 months your portfolio has returned 23% odd percent. But standalone returns are meaningless unless you compare them with the benchmark. So here’s the comparison.

	31-Mar-2012	3-Oct-2012	Growth
Sensex	17,404	18,870	8.42%
Nifty	5,296	5,731	8.21%
Portfolio NAV	10.00	12.33	23.25%

Voila! You were able to beat both the Sensex and Nifty hands down with your 2 stock portfolio and in the process generated 23.25% returns for yourself.

So in effect the NAV based measurement gives you a direction how you are performing vis-à-vis the market moves. It is critical that your overall portfolio is beating the benchmarks; a sudden gain in a couple of stocks and large losses in others is of no benefit to you at the end of the day.

Thus if one is unable to beat the benchmarks or average mutual fund returns over a period of time, then he would be better off leaving direct investments in equities and should choose diversified mutual funds for investing his hard earned cash.

Happy Investing!

Additional parts based on reader comments: 9th Oct 2012

 Part 8: Adding fresh funds to the portfolio

As readers pointed out this is of critical importance for salaried employees to know how to fit in fresh capital into the portfolio. So let us suppose you plan to put in additional Rs 50,000 into the portfolio on 3^rd Oct.

So since the current NAV for your portfolio is at 12.33 you are issued new units at this rate. Hence 50000/12.33 = 4055.15 units are issued over and above the existing 10,000 units. Also the fresh capital of Rs 50,000 is added on to the cash balance of the portfolio. 

Hence the portfolio looks like the following: 

Date	3-Oct-12		Units	14055.20		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost/ share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400.0	70	520	620	43,400.0	430
2	Titan Indus	47,150.0	230	205	259	59,570.0	402.5
3	Cash	70,282.5				70,282.5
	TOTAL	153,832.5				173,252.5

 

Part 9: Withdrawing funds from the portfolio

 Similarly if one wants to withdraw any funds for other investments /consumptions   

 equivalent amount of units will be reduced from the portfolio.

Suppose you want to withdraw Rs 15,000 for making a tax saving fixed deposit as you realize bank rates are going to get reduced soon and you need to rush.

Thus what happens to the portfolio is that the units get reduced proportionately and so for Rs  15,000 you need to redeem 1217.04 units. Note that the cash balance as on 3rd Oct (refer Part 7 end) of Rs 20,282.5 gets reduced by Rs 15,000.

 Hence the portfolio looks like as follows.

Date	3-Oct-12		Units	8782.96		NAV	12.33
Sl. No.	Name of Stock	Invested Value	Shares held	Cost/ share	Current Price	Present Value	Dividend amount
1	HDFC Bank	36,400.0	70	520	620	43,400.0	430
2	Titan Indus	47,150.0	230	205	259	59,570.0	402.5
3	Cash	5,282.5				5,282.5
	TOTAL	88,832.5				108,252.5

So note that irrespective of any additional capital input/withdrawal the NAV won’t change on that given date. Only the total units and cash component will rise (additional capital) or fall (capital withdrawal). Also dividends payout is the case when your cash increases without an increase in units.

Put in your queries/comments if you need additional clarifications on any part.