Are You Really Doing Well in the Stock Market? Here’s How to Find Out!

Evaluating Your Entire Portfolio, Not Individual Investments

If you invest in multiple Mutual Funds, stocks, ETFs, or SIPs, assessing performance individually can give a distorted view. A few winning stocks may mask losses elsewhere, while underperforming funds may drag overall returns. The right approach is to aggregate your entire portfolio — total investments and current value — and then calculate a unified return. This consolidated measure reflects how efficiently your total capital is compounding, providing a true picture of your financial progress and whether you’re outperforming or lagging behind key benchmarks like the Nifty 500.

Why Comparing Returns Matters

Many investors often gauge their performance by how much profit they’ve made — but without context, these numbers mean little. The true test lies in comparing your returns against a benchmark such as the Nifty 500, which represents a broad spectrum of Indian equities. If your portfolio consistently underperforms this benchmark over time, it signals the need to reassess your stock selection, asset allocation, or timing strategy. On the other hand, if you beat or match it after costs and Taxes, you’re on the right path.

Key Types of Returns and What They Indicate

To accurately measure performance, investors can use different types of return calculations, each suited for specific scenarios:

1. Absolute Return: This is the simplest measure — it shows total growth over a period, irrespective of time.

Formula: [(Current Value – Initial Value) / Initial Value × 100]

Use: Ideal for short-term or single-period investments, such as a stock bought and sold within a year. However, it doesn’t consider how long you held the investment.

2. CAGR (Compound Annual Growth Rate): CAGR smoothens the returns over multiple years, showing the consistent annual growth rate if the investment had grown steadily.

Formula: [(Ending Value / Beginning Value)^(1 / No. of Years) – 1]
Use: Best for evaluating long-term investments like mutual funds or equity portfolios over 3–5 years.

3. IRR (Internal Rate of Return): IRR measures the rate of return where the net present value (NPV) of all cash flows — both in and out — equals zero.

Formula: (In Excel) =IRR(A1:A10)
(Enter investments as negatives, redemption as positive.)

Use: Suitable when multiple investments or withdrawals occur at regular intervals, such as SIPs (Systematic Investment Plans). It assumes all cash flows occur evenly.

4. XIRR (Extended Internal Rate of Return): An improvement over IRR, XIRR handles irregular cash flows with different dates.
    

Formula: (In Excel) =XIRR(A1:A10, B1:B10)
(A = cash flows, B = dates; result is annualized return.)

Use: Ideal for real-world scenarios where investments and redemptions happen at varying times and amounts — like staggered stock purchases or SIPs with partial withdrawals.

5. TWRR (Time-Weighted Rate of Return): TWRR removes the effect of cash flows and focuses purely on portfolio performance. It measures the geometric mean of periodic returns, neutralizing the impact of investor timing.

Formula: (In Excel) Calculate each period’s return, then multiply: (1+r1)*(1+r2)*… -1
(Shows compounded performance of the portfolio.)

Use: Perfect for comparing fund manager or portfolio performance, where investment timing is beyond your control.

Comparing Returns with Benchmarks

To judge how well you’re doing, match your return type with the right benchmark. For instance:

• If you’re evaluating long-term portfolio performance, compare your CAGR with the Nifty 500’s CAGR over the same period.
• If you invest through SIPs, your XIRR should be compared to a SIP return of a benchmark Index Fund.
• For professional portfolio evaluation, TWRR offers the most accurate comparison since it isolates market performance from investor timing.

Adjust for taxes and costs like brokerage and fund expenses, as benchmarks don’t account for them. Beating the benchmark after costs means you’ve added real value.

Conclusion

In investing, success is relative — not absolute. Earning 12 per cent might sound impressive until you realise the Nifty 500 delivered 15 per cent in the same period. Understanding and applying the right return metric — be it XIRR for irregular flows or CAGR for long-term growth — gives a clearer picture of your true performance. Regularly benchmarking your results ensures you stay grounded, data-driven, and aligned with your long-term financial goals.