Many asked about how to calculate return rate.
Return explanation would involve lot of math and google sheet formulas.
If those are allergic to you, stop right here and save yourself some time.
For the bold ones who do not mind a math session,
Hello, I am Vijay Mohan and you are watching - Investment Insights.
Say that you have invested Rs. 100 in an asset. Let's call it "Asset 1".
It is growing to Rs. 150. Then your profit is Rs. 50.
What % is this profit in your original investment of Rs. 100?
50%. That is your return.
It has many names like Rate of Return, Return on investment etc.
This can be used to calculate the absolute return of an investment.
But what is the problem here?
We cannot compare this return to another asset's return.
Let's say that there is another asset "Asset 2". You are investing Rs. 100 there as well.
It grows to Rs. 125. Then your return is 25%.
Which one is better? Asset 1 or Asset 2?
What kind of question is this? 50% is more than 25%. So asset 1 is definitely better. Right?
We cannot say that because an important data is missing here.
How long did it take for Asset 1 to give a return of 50%?
How long did it take for Asset 2 to give a return of 25%?
Only if we have that period information, we will be able to compare the returns from these two assets.
Let's say that you held the Asset 1 for 3 years.
Asset 2 for 1 year.
Now you have period information. How can compare now?
We should use CAGR for that. Compounded Annual Growth Rate.
This is CAGR's formula. Asset 1's CAGR is 14.47%.
That means, if Rs.100 is growing at a rate of 14.47% per year, then it would have given a profit of Rs.50 in 3 years.
So Asset 1 is growing at a rate of 14.5% per year.
Asset 2 is growing at a rate of 25% per year.
So which asset has given a better return? Asset 2.
But what is the problem with using CAGR? There are two problems.
This CAGR is saying that this Rs.100 has gone up to Rs.150 in 3 years growing at a rate of 14.47%.
But it does not have the information on how the journey was.
That is, before getting to Rs.150, how high did the value go and how low did the value go - that volatility information is not given by CAGR.
So when we compare the return of two assets, we should not use this CAGR blindly.
We should be familiar with the volatility of the assets as well.
Another problem with CAGR is - we can use this to calculate lumpsum return.
But if we are investing every month, then we cannot use CAGR to calculate the total return.
We should use XIRR for that.
Before digging into XIRR, let's understand what IRR. is.
IRR is Internal Rate of Return. This is the formula.
Don't get scared by the Greek letters here. We will not use this formula at all.
Today all of us got computers. We can easily use excel or google sheet's IRR function.
IRR uses an investment's cashflow to calculate its annual return.
Let's say that we are investing Rs.100 in Jan 2021 and Rs.200 in Jan 2022 in an asset.
Because money is leaving from our hand into an investment, we are seeing them as negative in the cashflow.
This investment grows to Rs.500 in 2023. We are selling our investment and cashing it out.
Because now that the cash came to our hand, it is shown as positive entry here.
Our rate of return (absolute return) is 66.67%.
But what is our annual growth rate? For that, we are going to use IRR function
All IRR function needs is just the cashflow information for each year. That is all.
It is here. Result: 45%.
But the problem with IRR function is, it does not have date information.
It is assuming that each entry here is a cashflow happened each year.
So if we are investing only on one specific day in a year, then we can use IRR function.
But practically it is not possible.
We buy and sell any time. So IRR is not going to serve our purpose.
We should use XIRR. Extended Internal Rate of Return.
XIRR considers dates as well.
Now let's use the XIRR function to calculate the return for our data.
Cash flow data is given as first input.
Dates data is given as second input.
Result is, same 45%.
Let's change the date.
Let's change the second entry from Jan 1 2022 to Jun 1 2021.
Now the XIRR has gone down to 34%.
This is our annualised return.
IRR return is still showing the old 45%, because it is not considering the dates.
To calculate our investment returns, we should use XIRR function.
RoR, IRR should not be used. Let's take a look at a practical example.
You are investing in Canara Robeco Emerging Equities.
So far, you have purchased 3 times.
Jan 2021 Jun 2021, and Jan 2022.
You are investing Rs.10,000 every time.
XIRR function needs the investment shown in negative. And so we are seeing it as negative here.
Google sheet is automatically showing the purchase price here depending on the fund code and date.
How many units of funds would have bought for Rs.10,000 is shown in purchased units column.
Current price is showing the fund's current NAV price.
Current value is showing the current value of Rs.10,000 investment.
So we are seeing 3 entries here for 3 purchases.
XIRR formula needs not just the purchase dates, but also sold date.
You have not sold this yet. But we are going to assume that we are selling it Today and so we are seeing Today's date.
The current total value that we would get by selling Today is also shown here.
XIRR formula uses this date and cashflow data.
So your portfolio's total return is 9.1%.
How can we compare this to an Index fund return?
We have to just repeat the same process for an index fund.
That is, we have to calculate the return as if we have invested Rs.1,000 in the index.
Here in this example, I have used Nifty 50 Index.
The same Rs.10,000 was invested in Nifty 50 index on the same days as the other fund, this would give us a return of 8.65%.
You can compare your performance with an Index performance like this.
Today almost in all brokerages, they show your performance comparing it to an index performance in charts.
But if you want to compare it manually, you can use this sheet.
Donate Rs.100 and download this sheet. Link is in the description.
I am kidding. All free. Go ahead and download and enjoy.
You will not be able to edit this sheet. But if you copy it to your account, you will be able to edit.
All you have to change is, this google specific fund code, purchase dates and the the invested money.
Everything else gets populated automatically.
It is that simple to calculate your return rate. We will soon meet again in another episode. Thank You!