Everyone is chasing something or the other, though we all know there is no end to it. We must devise a strategy, wherein we systematically pull out of that race, else we will find ourselves in stress & disappointment. In our financial journey, through financial planning we may build a strategy that will keep us away from chasing others and unimportant things. It keeps you on track and lets you focus on what is really important & relevant to you. It saves a lot of your time & protects you from making mistakes, as you already know, Where do YOU want to go?, How would YOU reach there? & What are YOUR challenges in reaching there? You get answers to these questions, which are related to achieving your financial goals. Remember, It is all about you.
In our earlier post, Does portfolio comparison really help?.. Part 1 we have discussed, why we get confused by comparing two portfolios where starting dates are different. We have also discussed, that a portfolio where returns are seemingly low, might be better for your financial goals achievement.
The major reasons why misinterpret the portfolio based on returns are:
- Starting point of portfolios: We have already discussed in our earlier article
- Investment Pattern
- Portfolio Composition
In this post we will understand point no. 2, why returns comparison of two portfolios may confuse us, if investment pattern are different for both the portfolios. Comparing returns of two portfolios blindly might push us to take decisions in haste, which could derail our financial planning process.
Key considerations in comparison:
- Portfolio A & B, that are being compared can be of 2 different investors or could be of same investor managed separately through 2 different advisors or platforms.
- We have taken Nifty 500 Multi-cap 50:25:25 TRI as the benchmark index to compare portfolio performance. It is a broad base index which has participation from all the market cap companies.
- SIP: Systematic Investment Plan (Regular monthly investment).
- Lumsum: Investing in a one shot purchase, without monthly commitment.
2. Misinterpretation due to Investment Pattern
Investing pattern can never be constant due to change in our income, risk, financial needs & emotions with time. There is no perfect way to invest, as economic cycles are dynamic & unpredictable.
Let us evaluate few investing scenarios & their impact on our portfolio:
| Portfolio A | Portfolio B |
Investment Scenario 1 | Lumsum investment | SIP investment |
Investment Scenario 2 | SIP investment | Additional lumsum investment in between SIP investment |
Investment Scenario 3 | Discontinued SIP | SIP investment |
Investment Scenario 4 | SIP investment | Increasing SIP investment annually by 10% |
In our investment journey, we earn and invest regularly to achieve our financial goals. There might be investors who invest monthly, annually or intermittently after every few months. But that’s for sure that we invest multiple times during our investing years.
SIP in mutual funds have evolved as one of the best ways to invest in a disciplined manner and create wealth in the long term. SIP is a method of monthly or quarterly investing a fixed amount in mutual funds, we will use SIP as a primary investment tool in this post.
Let us start evaluating all these 4 investment scenarios mentioned above one by one.
Investment Scenario 1
Portfolio A | Portfolio B |
Lumsum investment | SIP investment |
Investment Details | Portfolio A: Lumsum Investment | Portfolio B: SIP (per month investment) | |
| Investment Scenario 1 | Investment Benchmark | Nifty 500 Multicap 50:25:25 TRI | Nifty 500 Multicap 50:25:25 TRI |
| Investment Amount | ₹100,000 | ₹10,000 | |
| Start Date | 1 Apr, 2020 | 1 Apr, 2020 | |
| Total Investment | ₹100,000 | ₹470,000 | |
| Current Value as on 29 Feb 2024 | ₹357,582 | ₹802,271 | |
| CAGR Returns | 38.47% | 28.19% | |
In the above scenario, it is clearly visible that portfolio A has given higher returns than portfolio B. But if you will evaluate both the portfolios on the basis of your personal financial planning, the outcome could be different.
You should evaluate investment outcomes based on their relevance to your financial goals. When your financial goals will arrive they will be funded by corpus you have accumulated and not just percentage returns on your portfolio.
What must matter to you are:
- How much wealth you have accumulated to fund your upcoming goals
- How much return you have generated on your overall wealth and not see returns on a few investments in isolation.
- How you are managing risk in your portfolio
Investment Amount
Total Wealth Created
Portfolio Gain
Portfolio Return (CAGR)
Portfolio A
₹ 100,000
₹ 357,582
₹ 257,582
38.47%
Portfolio B
₹ 470,000
₹ 802,271
₹ 332,271
28.19%
Though portfolio A has given higher returns of 38.47%, but it could only accumulate total Rs. 357,582 with Rs. 257,582 (Rs. 357582- Rs. 100000) as gain for the investor. While portfolio B delivered 28.19%, but accumulated Rs. 802,271 in total with Rs. 332,271 as gain.
The Difference in returns is due to the fact, that in portfolio A, there is only a single investment instance. As the money was invested only once and at the begin of the portfolio tenure, so it became the investor’s oldest investment. Mostly your oldest investments will give you the highest returns, as asset prices move up with time in the long-term. But assuming that you will invest only once in your life time does not make any sense. We earn regularly and mostly our earnings also grow with time, so it can be said that we have more money to invest in the future, than what is available today. So practically you have to invest regularly with time to generate returns on your income efficiently.
Investors need to understand that their returns are the result of the multiple investing instances rather than a single instance. There is no point in becoming too happy or sad based on the outcome of few investing instances. Investing is a long journey of lifetime and your returns will average out with time. With time you will realise that micro managing the portfolio does not have substantial impact on portfolio returns & if it does have, than surely it does not impact positively.
The ideal investment scenario could be, if you had Rs. 100,000 at the beginning of the investment, you could have invested Rs. 100,000 and started an SIP of Rs. 10000 along with it.
The investor’s overall portfolio (Portfolio A + Portfolio B) situation would be:
Investment Amount | Total Current Value | Portfolio Gain Amount | Portfolio Return (CAGR) |
Rs. 570,000 | Rs. 1,159,853 | Rs. 589,853 | 32.19% |
Investment Scenario 2
Portfolio A | Portfolio B |
SIP investment | SIP with in-between lumsum investment |
| Portfolio A: SIP (per month investment) | Portfolio B: SIP (per month investment) | ||
| Investment Scenario 2 | Investment Benchmark | Nifty 500 Multicap 50:25:25 TRI | Nifty 500 Multicap 50:25:25 TRI |
| Investment Amount | ₹10,000 | ₹10,000 | |
| Start Date | 1 Apr, 2020 | 1 Apr, 2020 | |
| Additional Investment on Sep 2021 | NA | ₹100,000 | |
| Total Investment | ₹470,000 | ₹570,000 | |
| Current Value as on 29 Feb 2024 | ₹802,271 | ₹953,682 | |
| CAGR Returns | 28.19% | 26.26% |
In the above investment scenario in Portfolio A, investor has continued SIP of ₹ 10,000 for 47 months from Apr, 2020 till 29th Feb, 2024. While in Portfolio B investor has continued SIP with same amount and tenure, but has invested additional ₹ 100,000 in Sep, 2021.
| Investment Amount | Total Wealth Created | Portfolio Gain | Portfolio Return (CAGR) |
Portfolio A | ₹ 470,000 | ₹ 802,271 | ₹ 332,271 | 28.19% |
Portfolio B | ₹ 570,000 | ₹ 953,682 | ₹ 383,682 | 26.26% |
Portfolio A has generated returns of 28.19% by investing only through SIP. It has created a total wealth of ₹ 802,271 with a gain of ₹ 332,271. Portfolio B could generate only 26.26% returns during the same period through SIP and additional purchase of ₹100,000. But Portfolio B was able to create a total wealth of ₹ 953,682 with a portfolio gain of ₹ 383,682. Portfolio B has more positive impact on investor’s financial journey. It enabled investor to create more wealth which will further compound more and more with time.
So, even if you are investing regularly through SIPs, you must invest more through in between additional purchases, whenever you have some additional money which can be invested for long-term.
Investment Scenario 3
Portfolio A | Portfolio B |
Discontinued SIP Investment | Regular SIP investment |
Investment Details | Portfolio A: Discontinued SIP (per month investment) | Portfolio B: SIP (per month investment) | |
| Investment Scenario 3 | Investment Benchmark | Nifty 500 Multicap 50:25:25 TRI | Nifty 500 Multicap 50:25:25 TRI |
| Investment Amount | ₹10,000 | ₹10,000 | |
| Start Date | 1 Apr, 2020 | 1 Apr, 2020 | |
| Investment continued till | Mar 2021 | Feb 2024 | |
| Total Investment | ₹120,000 | ₹470,000 | |
| Current Value as on 29 Feb 2024 | ₹302,803 | ₹802,271 | |
| CAGR Returns | 30.62% | 28.19% | |
In investment scenario 3 under Portfolio A, investor started SIP of ₹ 10,000 in Apr, 2020, kept it running for 12 months till Mar, 2021& later discontinued it. On the other hand, in Portfolio B, investor continued SIP of ₹ 10,000 for 47 months from Apr, 2020 up till Feb, 2024.
| Investment Amount | Total Wealth Created | Portfolio Gain | Portfolio Return (CAGR) |
Portfolio A | ₹ 120000 | ₹ 302,803 | ₹ 182,803 | 30.62% |
Portfolio B | ₹ 470,000 | ₹ 802,271 | ₹ 332,271 | 28.19% |
Portfolio A has generated a total wealth of ₹ 302,803 with a gain of ₹ 182,803 at a rate of 30.62%. In Portfolio B returns might be seemingly lesser at 28.19%, but it has amassed a wealth of whopping ₹ 802,271, with again of ₹ 332,271. By now you must have understood, how to look at the portfolio and what’s better for you.
It’s not in your complete control how much return you will get, but what’s in your control & more important to you is whether you have continued your SIP or not. Focus more on what can be controlled by you, rather than speculating on returns and those things which are beyond your control.
Investment Scenario 4
Portfolio A | Portfolio B |
Regular SIP Investment | Annual Incremental SIP investment |
| Portfolio A: SIP (per month investment) | Portfolio B: SIP (per month investment) | ||
| Investment Scenario 4 | Investment Benchmark | Nifty 500 Multicap 50:25:25 TRI | Nifty 500 Multicap 50:25:25 TRI |
| Investment Amount | ₹10,000 | ₹10,000 | |
| Annual SIP Amt. Increase: 10% | NO | Yes | |
| Start Date | 1 Apr, 2020 | 1 Apr, 2020 | |
| Total Investment | ₹470,000 | ₹539,000 | |
| Current Value as on 29 Feb 2024 | ₹802,271 | ₹896,292 | |
| CAGR Returns | 28.19% | 28.19% |
In the above scenario, investor invested through SIP of ₹ 10,000 from Apr, 2020 till Feb, 2024, in both Portfolio A & Portfolio B. But in Portfolio B, investor increased his SIP amount annually by 10%.
| Investment Amount | Total Wealth Created | Portfolio Gain | Portfolio Return (CAGR) |
Portfolio A | ₹ 470,000 | ₹ 802,271 | ₹ 332,271 | 28.19% |
Portfolio B | ₹ 539,000 | ₹ 896,292 | ₹ 357,292 | 28.19% |
Both the portfolios have generated same returns of 28.19%, as all the investment dates are same for both of them. But Portfolio B has created higher total wealth of ₹ 896,292 compared to Portfolio A, which could create only ₹ 802,271. So it could be said that at the same returns two investment portfolios may have different value to the investor. So it is very important to increase your SIPs regularly to create more wealth.
It does not matter how much return you generated on your portfolio, what matters is how much wealth you have accumulated with a descent inflation adjusted return on your overall portfolio. Overall portfolio includes all your investments including stocks, mutual funds, FD’s, gold, real estate etc. Generating higher returns on a very small part of your overall portfolio will not have any significant impact on your overall wealth.
In investments, what seems too good and exciting today might not remain the same in future. When returns come as a windfall, investors start thinking that it’s too easy and they have cracked the code of investing. This is not the first time when investors have started chasing returns, in the hope that it will be that easy forever. But they must never forget, nothing is free and sooner or later they will have to pay the price for this race. Always remember, If things are going too easy, it is the time to become cautious.
Investments are not like hunting, they are like farming, where you have to take care of the crop from the time you sow the seeds, till the harvest season arrives. The same goes with investments, you have to take care of your emotions & behaviour all through your investing journey, till your financial goal arrives.
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