How to calculate portfolio return

Human beings have developed numerous ways to evaluate different aspect of life. Like school grades in childhood, manager’s appraisal in jobs, return on equity for shareholders, etc. You name the aspect, I bet there will be a measure associated to evaluate it.

Portfolio return is one such measure or ‘the’ most important measure, to measure a portfolio’s performance. It measures the performance of portfolio manager, or yours if you happen to manage the portfolio by yourself.

Among the many available variant for portfolio return below three are most commonly used variants

• Simple Rate of Return (SRR)
• Money Weighted Return (MWR)
• Time Weighted Return (TWR)

Let us understand the difference between these three measures:-

Simple Rate of Return - As the name implies it is the most simple way to calculate portfolio return. It is simply return of the current holdings in the portfolio. But unfortunately it is not correct measure of the portfolio return as it does not take into account the performance of past holdings in the portfolio. Most brokerages only provide the return of the current holdings in the portfolio which is not the true return of the portfolio.

Money Weighted Return – MWR or IRR (Internal Rate of Return) takes into account the portfolio cash flows for return calculation. It is the return which equates the external cash flows and the ending value of the portfolio with the initial investment made into the portfolio. However, this return is affected by the size and the timing of the cash flows and is not the recommended way for measuring portfolio’s return.

Time Weighted Return -  TWR is considered to be the true measure of the portfolio return. It calculates the portfolio return after eliminating the impact of cash flows from the portfolio. TWR actually measures the  performance of the underlying assets in the portfolio. TWR is recommended by the Global Investment Performance Standard (GIPS) for measuring portfolio’s performance. This return can be used for goal setting and comparing the performance of the portfolio with different benchmarks.

TWR Calculation
Basic fundamental behind TWR calculation is to break down the holding period into smaller periods such that each period’s start date and end date correspond to any cash flow that occurred in the portfolio. Then the return for each sub period is calculated by eliminating the effect of cash flow from the portfolio’s ending value for that period. After that the returns of each sub periods are multiplied to come up with the true holding period return for the portfolio.

Lets try to understand TWR calculation using a sample portfolio.

Step 1. Lets start by adding some transactions in the portfolio

Table 1. Transaction Table

Date	Stock	Qty	Price	Transaction Type
10-Jan-2013	Stock A	10	100	Buy
14-Apr-2013	Stock B	20	200	Buy
14-Apr-2013	Stock A	5	120	Sell
31-Jul-2013	Stock B	10	150	Sell
31-Jul-2013	Stock A	5	140	Sell

Step 2. Now using above transactions we will create the portfolio valuation table.
Create portfolio valuation for each date on which there was a transaction in the portfolio.

Table 2. Valuation Table

Date	Beginning Value	Buy	Sell	Ending Value
10-Jan-2013	0	1000	0	1000
14-Apr-2013	1200	4000	600	4600
31-Jul-2103	3700	0	2200	1500

Note - For simplicity I have assumed same beginning and ending price on any given day

Sample Calculation –

Beginning Value on 14-Apr = Portfolio holdings at the beginning of 14th Apr * Price

= 10 (Stock A) * 120 (Price of A) = 1200

Ending Value on 14-Apr = Portfolio holdings at the end of 14th Apr * Price

= 5 (Stock A) * 120 (Price of A)  + 20 (Stock B * 200) = 4600

 

Step 3. Calculate return for sub periods by eliminating the effect of cash flows

Table 3. Sub Period Return

Period	Beginning Value (Last period’s Ending Value)	Adjusted Ending Value (Ending Value + Sell – Buy)	Return (Using Adjusted Ending Value and Beginning Value)
10-Jan to 14-Apr	1000	1200	20
14-Apr to 31-Jul	4600	3700	-20

 

Step 4. Compute total time weighted return by multiplying sub period holding period returns

TWR =  (1 + .2) * (1 – .2) – 1 = – 4%

So the total time weighted return for portfolio comes out to be – 4%

 

Annualized Return – We can apply the above approach to calculate the annualized return for the portfolio as well. For e.g lets say the TWR for a portfolio with holding period of 3 years comes out to be 40%. Then we can use the compounding return formula to calculate the annualized return. Therefore, if ‘r’ is the annualized return for each year, then
((1 + r) ^ 3 – 1) = 40
therefore, r = 12% approximately

In next post I will show how we can further improve portfolio return by daily valuing the portfolio. This would also help in measuring the volatility of the portfolio and thus help in comparing the performance of the portfolio with the benchmark as well as other portfolios.

How to calculate capital gains tax for the portfolio?

Come financial year end and most of the investors get jittery about tax implications of their portfolio, especially with all the accounting it involves. Many investors do not know how to calculate the tax liability for their portfolio. Knowing tax capital gains tax liability not only helps in filling income tax return but it could also help in making sell decisions. In this post we will walk through the capital gains tax and its calculation.

What is Capital Gains Tax?
Capital Gains tax is the tax that an investor has to pay on the income earned from his investments in a given financial year. These include income from selling stocks, mutual funds, bonds etc.
There are two categories of capital gains:-

• Short Term Capital Gains - Gains earned from securities that were held for less than a year
• Long Term Capital Gains - Gains earned from securities that were held for a year or more.

Capital Gains Tax Structure
Following table summarizes the current capital gains tax structure:-

Direct Equity		Mutual Funds
		Equity		Non Equity
Short Term	Long Term	Short Term	Long Term	Short Term	Long Term
15.45% = 15% + 3%*	Nil	15.45% = 15% + 3%*	Nil	Applicable Income Tax Slab + 3%*	10.30% (Without Indexation) = 10% + 3%* 20.60% (With Indexation) = 20% + 3%*

* = Education Cess
Indexation helps in reducing the tax liability by taking into account the effect of inflation on the purchase price of a security.

Dividend Distribution Tax
Apart from Capital Gains tax there is tax implication on the dividend earned on held securities. Following table summarizes the dividend distribution tax:-

Direct Equity	Mutual Fund
	Equity	Debt Schemes	Money Market and Liquid Schemes
Nil	Nil	13.519% = 12.5% + 5%** + 3%*	27.0375% = 25% + 5%** + 3%*

* = Education Cess, ** = Surcharge  

Capital Gains Tax Computation
Capital Gains Tax Computation is three step process.

1. Determining the holding period for the security
First step in calculating the capital gains tax is to determine the duration for which the security was held before it was sold. This is simple if there was only one buy and one sell transaction in a security. In this case it would simply be the difference between sell and buy dates. But when there are multiple buy and sell transactions in the same security then the principle of First In First Out (FIFO) has to be applied.
Lets try to understand using the following diagram


In the diagram above, there were three buy transactions and two sell transactions. First sell transaction occurred on 15-Jan-13. Shares sold under this transaction would be adjusted against shares bought on 15-Feb-12. Since the holding period for these shares was 11 months therefore, it would be considered as short term capital gain. Second sell transaction of 100 shares happened on 15-Mar-13. Now first 50 shares out of the 100 would be adjusted against 50 shares bought on 15-Feb-12. Since holding period for these was 13 months, therefore, it would be considered as long term capital gain. Second 50 would be adjusted against 50 shares bought on 10-May-12. Since holding period for these was 10 months, therefore, they would be considered as short term capital gains.

2. Computing the Capital Gains
After computing holding periods for all the security transactions we would compute the capital gains earned for each of the transaction. Following table summarizes the capital gains earned in the example above.

Sell Transaction Date	Corresponding Buy Transaction Date	Holding Period	Capital Gain Type	Capital Gain
15-Jan-2013	15-Feb-12	11 Months	Short	50 * 350 – 50 * 200 = 7500
15-Mar-2013	15-Feb-12	13 Months	Long	50 * 400 – 50 * 200 = 10000
15-Jan-2013	10-May-2012	10 Months	Short	50 * 400 – 50 * 250 = 7500

 

3. Computing Tax Liability

Financial Year	Capital Gain Type	Capital Gain	Tax Liability
2012-13	Short	7500 + 7500 = 15000	15000 * 0.15 = 2250
2012-13	Long	10000	Nil

Same procedure can be applied for all the instruments held in the portfolio to determine the capital gain type and the actual capital gain tax for the overall portfolio.

I hope this would help the investors in clarifying the tax calculations for their portfolio.

Comparing Indian Portfolio Trackers

There are many free portfolio tracking applications available for Indian investors. It could be hard for the investors to select the right application for tracking their portfolio.

A good portfolio tracking application should not only provide the current investment status but it should also provide host of other useful features. Some of the features are listed below:-

1. Allow multiple asset classes like Stocks, ETFs, Mutual Funds, Bonds, FDs etc

2. Automatic adjustments of stocks for corporate actions such as splits, bonuses, dividends and mergers.

3. Past performance of the portfolio and compare it with the benchmark

4. Short term and long term gains that help in tax computation

5. Email alerts on corporate actions, important announcements, sudden changes in market value

6. Weekly and monthly report on portfolio performance

In this post we are comparing the features of few the most popular portfolio tracking applications. This should help the investors in choosing the right application for tracking their investments.

Portfolio Feature	Moneycontrol	Askkuber	Etportfolio	Iwealth myiris	Ndtvprofit	Rediff
Subscription Price	Free	Free	Free	Free	Free	Free
Portfolio (Single/Multiple)	Multiple	Multiple	Multiple	Multiple	Multiple	Multiple
Corporate Action Adjustment (Splits/Bonus/Dividend)	Automatic	Automatic	Automatic	Automatic	No	No
Corporate Action Demerger Support	No	Yes	No	No	No	No
Securities/Assets Handled	Stocks Mutual Funds ULIP Bullion Fixed Income Loans Property Other assets	Stock ETF Mutual Fund Fixed Deposits	Stocks Mutual Funds Real Estate Gold Silver Fixed Income	Stocks Mutual Funds ULIP Bullion	Stocks Mutual funds	Stocks Mutual funds
Transactions Handled	Buy Sell Edit Delete	Buy Sell Edit Delete	Buy Sell Edit Delete	Buy Sell Edit Delete	Buy Sell Edit Delete	Buy Sell Edit Delete
Dividend Income	Yes	Yes	Yes	No	No	No
Tax Calculation (Long/Short Term Capital Gains)	Yes	Yes	Yes	Yes	No	No
Historical Performance	Yes	Yes	Yes	No	No	Yes
Benchmark Comparison	Yes	Yes	No	No	No	Yes
Bulk Upload/Import Transactions	Yes	Yes	Yes	No	No	No
Share Portfolio	No	Yes	No	No	No	No
Realized/Unrealized Profit/Loss Summary	Yes	Yes	Yes	Yes	Yes	No
Email Alerts on Triggered (Bonus/Dividends/Splits)	No	Yes	No	No	No	No
Sector Allocation	Yes	Yes	Yes	No	Yes	No
Alerts (News/Price Targets)	Yes	No	Yes	Yes	No	No
Alerts on Price Triggered	Yes	Yes	Yes	No	No	No
Email Reports (Portfolio Summary)	No	Yes (Weekly, Monthly & Yearly)	Yes (Weekly)	No	No	No
News on stock	Yes	Yes	Yes	Yes	No	No
Export/Import Data	Yes	Yes	Yes	Yes	No	No
Transactions History on Chart	No	Yes	No	No	No	No

Following are the links to the portfolio websites:-
www.moneycontrol.com
www.askkuber.com
etportfolio.economictimes.indiatimes.com
money.rediff.com
www.iwealth.myiris.com
profit.ndtv.com