While India has seen an unprecedented rise in retail investors, reaching the 10 Crore mark on March 16, 2022, not all of us are making the most of our investments. A nationwide analysis of over 334,000 mutual fund portfolios by Dezerv's Wealth Monitor app has uncovered a troubling fact that nearly 63% of investors’ portfolios are underperforming the market benchmarks. This underperformance has resulted in staggering missed gains totalling over Rs 3,500 crores. The culprit? An overreliance on simpler metrics like CAGR, poor asset allocation and inability to timely rebalance one’s portfolio based on market changes.
“Consider two investors reaching the same final amount after five years: one with a lump sum investment, the other adding money regularly. CAGR would show identical performance for both, despite the latter's money being at work for less time”, said Sandeep Jethwani, Co-Founder of Dezerv. This misrepresentation can lead to poor decision-making and a false sense of portfolio health.
This is understandable. Most of us invest in addition to our day jobs. We do not have the time, headspace, or expertise to assess our portfolio’s performance against correct market benchmarks. This is where Dezerv's Wealth Monitor intends to assist investors by identifying which of their funds are underperforming vs their appropriate industry benchmark, calculating the exact value of missed gains, and sharing a brief view of how diversified their portfolio is.
What truly sets the Wealth Monitor apart is its use of an Extended Internal Rate of Return, or XIRR, instead of CAGR to compare against market benchmarks. Let’s understand the difference between them.
Why XIRR Trump CAGR
XIRR is generally considered a better metric than CAGR for tracking mutual fund and stock performance, especially for investments with irregular cash flows like SIPs.
| Aspect | XIRR (Extended Internal Rate of Return) | CAGR (Compound Annual Growth Rate) | Aspect | XIRR (Extended Internal Rate of Return) | CAGR (Compound Annual Growth Rate) |
| Cash Flow Handling | Designed for investments with irregular cash flows, like SIPs, handling multiple inflows and outflows. | It assumes a single initial investment and steady growth rate, making it less ideal for variable cash flows. | Cash Flow Handling | Designed for investments with irregular cash flows, like SIPs, handling multiple inflows and outflows. | It assumes a single initial investment and steady growth rate, making it less ideal for variable cash flows. |
| Timing Consideration | Considers the exact timing of each cash flow, providing a more accurate assessment of returns. | Simplifies growth into a single average rate, ignoring timing nuances. | Timing Consideration | Considers the exact timing of each cash flow, providing a more accurate assessment of returns. | Simplifies growth into a single average rate, ignoring timing nuances. |
| Performance Evaluation | Allows for a more nuanced evaluation of individual investments within a portfolio, aiding better decision-making. | Offers a general growth rate, which may not be as detailed for evaluating performance. | Performance Evaluation | Allows for a more nuanced evaluation of individual investments within a portfolio, aiding better decision-making. | Offers a general growth rate, which may not be as detailed for evaluating performance. |
| Realistic Return Assessment | Provides a realistic annualised return that reflects actual investment experience, including market fluctuations. | It can sometimes present an overly optimistic view by smoothing out volatility. | Realistic Return Assessment | Provides a realistic annualised return that reflects actual investment experience, including market fluctuations. | It can sometimes present an overly optimistic view by smoothing out volatility. |
Therefore, Xirr provides a more accurate assessment of a portfolio’s health than CAGR, enabling the quicker and easier identification of underperformance.
New Launch: Tracking XIRR of your stock portfolio
So far, the wealth monitor app has only been used to provide XIRR tracking and calculation of missed gains and benchmark comparison facilities for Mutual funds portfolios. But launching on [30th August], these features will also be extended to your stock portfolio. Users can compare all their equity and mutual fund investments across brokers in one place, instantly. Like their mutual funds, users can see their equity portfolio's XIRR at a glance, compare it against appropriate benchmarks, and identify underperformers. Since we're talking equity here, the app also allows for market cap and sectoral views, identifying underperformance across market caps and sectors.
Even a single under-performing fund can be a massive drag on your portfolio’s performance.
While XIRR provides a more accurate picture of portfolio performance, calculating it manually can be time-consuming and complex, especially for investors with demanding careers and lives. This is where Dezerv's Wealth Monitor app comes through. The app instantly generates an easy-to-understand report that shows the XIRR of each of your funds. Within seconds, you can see how your investments really stack up against market benchmarks, identifying underperforming funds and missed opportunities. The app's ISO 27001 certification ensures that your portfolio data is securely pulled and used solely for analysis, empowering you to make informed investment decisions effortlessly.
Empowering Yourself to Meet Your Financial Goals
India’s $4.1 trillion equity market is on a growth trajectory, with benchmark indexes set to achieve a record eighth consecutive year of gains. Industry experts predict that mutual funds will claim an even larger share of household financial assets in the coming years.
No matter what investment strategy you pursue, the foundation of sound decision-making is reliable data. Investing, like any other discipline, requires consistency. The financial future you envision is shaped by the decisions you make every day. The easier it is to access quality data, the greater your chances of achieving your financial goals.
With the Wealth Monitor app, you can now equip yourself with the right tools to track and identify underperforming funds in your portfolio.
Disclaimers: Mutual fund investments are subject to market risks, read all scheme related documents carefully. Distribution services are offered through Dezerv Distribution Services Pvt. Ltd. (AMFI ARN -248439)
Moneycontrol Journalists are not involved in creation of this article.
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