Tips to assess portfolio for measuring investment success

These days more and more investors in India are investing in financial assets. While a lot of these investors are at an investment stage, they would need to soon start measuring investment performance.

At all my financial education sessions, when I ask the audience about their experience in investing in financial markets, I find most of the participants really have no idea on the performance of their investments. Many investors are not sure if they have invested in the right funds or how to review the funds held.

Further, at a portfolio level, too, investors find it difficult to calculate the overall return and hence do not know if they are actually making money overall.

So what should be the measure of investment success?

Most investors tend to evaluate their investment performance on absolute returns. The problem with absolute performance is that it doesn’t give the right picture on the fund performance. For e.g. an investment may have given 30% returns but the markets may have gone up by 40%. In such cases, the funds are clearly underperforming but the investor is happy because he has got a good absolute return.

The other way that performance is measured is relative to a benchmark. The benchmarks commonly used are stock market indices like S&P BSE 30, NIFTY 50 etc. All mutual funds always benchmark their performance to an index. However, relative performance to the benchmark cannot be used in isolation to review fund performance.

Investors must also compare how the fund has performed compared to other funds in the same category. However, within the same category of funds, each fund may have a different benchmark and hence comparing two funds becomes difficult. While various parameters like risk rations, rolling returns, etc. are to be used to evaluate funds, most investors would find it difficult to do this analysis. A better way then would be to compare the performance of a fund to the category average return, which is available online.

Hence, at a fund level, the investor can measure individual investment success by checking if the fund held has beaten the category average and its benchmark.

However, would beating an index or other funds be the right measure of investment success? Many a times, the index is not reflective of the risk tolerance and type of holdings an investor has. For example, an investor may prefer to invest in large-cap stocks but the benchmark being followed may have a smaller proportion of such shares. While a fund may be performing better than the index, parameters like inflation and compounding are not factored in.

For instance, an investor could be saving money for a house purchase. Now even if the investment is beating the benchmark, is it beating inflation too? Also, the cost of investing is not accounted for, especially in case of ULIP, where the fund maybe beating the benchmark but this return doesn’t include expenses like mortality cost, policy administration charges, etc.

I strongly believe that investment success is about being able to have enough for your financial goals. Having well performing funds are the means to the end. But the end, which is attaining financial goals, what is the true measure of success in one’s financial life.

And the only way to find out if the investments made, are sufficient to meet your goals is by creating a financial plan and sticking to the plan. The goal plan then becomes the benchmark to measure investment success. Having a plan in place also helps investors to figure out if they are choosing investments based on their investment horizon and risk profile.

Hence, to measure success at an overall portfolio level, investors must track on an annual basis, how much of their goals have been achieved by their investments and of course how these investments are performing individually in comparison to their category average.

Investment success is all about achieving what one wants with their money with the right instruments.