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From April 1, 2014, we are making a change to the way your return is computed. We're adopting a "Time Weighted Return" computation (XIRR), which takes into account the duration of your investments. This method more accurately reflects your return when you make multiple investments over a period of time as in a SIP.
Understanding the change with an example:
Let's say you invest Rs 20,000 per month for 8 months starting August 2013. The value on April 1, 2014 is Rs 175,000.
Return (Rs) = Current Value – Amount invested
= 1,75,000 – 1,60,000
= Rs 15,000
Return (%) = Return/ Amount invested x 100
= 15,000/ 1,60,000 x 100
= 9.30% for 8 months
OR 9.30 x 12 / 8 = 14.06% per annum
You will, however, note that you did not invest Rs 160,000 altogether 8 months ago. You invested some amount it every month. Each of your SIP amounts has been invested for different periods and earned a return for different periods of time.
August 13 investment (20,000) for 9 months
September 13 Investment (20,000) for 8 months
….
February 14 investment (20,000) for 2 months
March 14 investment (20,000) for 1 month
So in a way, it is incorrect to consider the amount invested as Rs 1,60,000. Think of your savings bank account – you earn interest on the balance on different days and NOT the balance at the end of the month.
XIRR shows your personal rate of return
There is a complex way to compute the rate of return called XIRR which considers the actual date on which your money was invested. It's also called the "Personal Rate of Return" because it's unique for each investor reflecting their investment pattern.
For someone investing just once at the beginning of the period, there is no difference in the return calculated by the two different methods. However for customers with SIPs, the simple return calculation tends to understate the return. For example the XIRR return in the above example is 26.8% per annum.
We are changing to XIRR to provide a better understanding of their investments' performance to investors who invest regularly.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
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You can write back to us at
PrajnaCapital [at] Gmail [dot] Com
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