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Home » News » Mutual Funds » MF Experts

Sep 07, 2010, 10.54 AM | Source: Moneycontrol.com

How well is your money doing

A performance evaluation is very hard to find in any of the investment documents whether it be your mutual fund or insurance statement, or your demat account statements. Here is a simple way to measure your returns.

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How well is your money doing

A performance evaluation is very hard to find in any of the investment documents whether it be your mutual fund or insurance statement, or your demat account statements. Here is a simple way to measure your returns.

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How well is your money doing
Measuring how well our money is doing seems trivial at first sight, but those of us who have tried will testify to what a nightmare it ends up being. A returns number is, surprisingly, very hard to find even in single products. A mutual fund statement often contains no measure of returns, or worse, a misleading one if there are dividends. Insurance statements are known to be notorious in making it impossible for the investor to decipher what returns they have made (I suspect they do this because investors seldom make any returns in such products!). Demat account statements fare no better.

NAVs and stock prices are poor indicators of investor returns, because they do not take into account the innumerable charges and transaction costs. Given this state of affairs even for individual products, measuring performance at portfolio level seems a bit of a dream. The logic for measuring returns is strong though. Can you imagine a car with no speedometer, a curriculum with no exams or mark-sheet, or a job without performance evaluation?

Without getting into complicated theory or calculations, let us look at a way to get a rough measure of returns. We call this the ‘bank-to-bank’ technique, since it only takes into account money flowing in and out of your bank account. It can be used for all types of investments: shares, funds, insurance, real estate, gold, deposits – you name it. The five-step procedure itself should take no more than 30 minutes, if you have your bank passbook updated and handy. All you need is an Excel Spreadsheet, with very basic knowledge of how to enter numbers into Excel.

The Procedure

(Refer to the diagram for an example)
1. Dig out your updated bank passbook / statement, going as far back as when you want to measure returns from. The first time, you will need to go back into the past. But from the next year onwards, you can use the same file you create today; and only add on the investments for the year

2. In your passbook, see all debit entries that correspond to money going out. See which of these correspond to investments. These could be mutual fund investments, share purchase, insurance premiums, real estate purchase, fixed deposits, etc. In your Excel sheet, put the date in the first column and the amount in the second. You can add a third column of comments if you want. Make sure you enter all these debit amounts as negative numbers, one below the other with corresponding date. Exclude rent / EMI for the house you are staying in, and all consumption expenses from this.

3. Now see all credit entries, and identify which of these belong to investments. These could be redemptions, dividends, interest, sale proceeds, etc. Enter all these as positive numbers one below the other, with corresponding date.

Examples of debit entries (Negative) Examples of credit entries (Positive)
Investing in a share Redemption of mutual fund
Investing in a mutual fund Dividend received on a share
Paying a life insurance premium Current market value of house (except the one living in)
Investing in a fixed deposit Current value of insurance units held
Down-payment for a house (except the one living in) Sale proceeds of share
EMIs on housing loan (except the one living in) Redemption of fixed deposit







4. See the market value of all investments above that you still hold (i.e. haven’t sold yet). Put today’s date, and enter these market values as positive numbers. Make sure you include rough market values of real estate and gold too, if you have included them above.

5. Finally, use the magical Excel function called XIRR. In a new cell, enter the formula “ = XIRR ( < select the amounts >, < select the date range > )”. Excel will give you the return on your investments as on today - you can read the result as a percentage.

You don’t need to understand how XIRR works; you only need to make sure your entries are complete and accurate. You can preserve this file, and re-use it when you want to measure returns again. Then, you only need to add the new investments and the new market value.












You just need to take a few precautions to make sure you don’t go very wrong in your entries:

• Take care of signs: all investments and debits are negative. Credits and market value are positive.

• If you are including an investment, make sure you include all aspects of it: the original investment, any dividends, redemptions and today’s market value if the investment still exists.

• If you have multiple bank accounts, make sure you include them all. The order of entries doesn’t matter though.

This is a simple and effective way to calculate approximate annual returns. Done properly, they can be an extremely useful tool for analysis and decision making. Note that these returns are annual.

We will see how to make sense of these returns and use them for intelligent decision making, in a subsequent article.

-Ramganesh Iyer
The author is Director, www.fintotal.com and can be reached at info@fintotal.com


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