Investing in the stock market is only one part of building wealth. Another crucial consideration that you should take into account is the performance of your investment. Portfolio return can help you with that because it provides an indication of the overall profitability or loss from your investments as well as the effectiveness of your financial plan. Calculating portfolio returns is important in order for you to become more effective in decision-making in terms of your investment.

Definition of Portfolio Returns

As mentioned above, portfolio returns denote the overall profit or losses made by your investments during a certain period of time. It involves calculating changes in the value of investments to determine if they are increasing or losing value. In addition, portfolio returns are computed through calculating both capital gains or losses as well as income received from your investments such as dividend payments and interest income.

Basic Formula to Calculate Portfolio Return

The simplest way to calculate portfolio return is by using the following formula:

Portfolio Return = (Current Value – Initial Investment) ÷ Initial Investment × 100

For example, if you initially invested ₹1,00,000 and your portfolio is now worth ₹1,20,000, the calculation would be:

(₹1,20,000 – ₹1,00,000) ÷ ₹1,00,000 × 100 = 20%

This means your portfolio has generated a 20% return.

The simple formula is effective when you invest once and refrain from adding or withdrawing any cash throughout the time.

Returns on Multiple Investments

When we have multiple assets in our portfolios like stocks, mutual funds, bonds, or exchange-traded funds, things become a bit complicated in terms of calculating returns. We need to multiply the percentage returns earned from each investment with the weight of that investment in our portfolio. It will help us calculate the weighted average return on our portfolio.

For instance, if 60 percent of our portfolio is allocated to one asset that earns a return of 10 percent, and the other 40 percent of our portfolio generates a return of 5 percent, our overall portfolio return will be:

(60% × 10%) + (40% × 5%) = 8%

This gives a more accurate picture because it accounts for the proportion of money invested in each asset.

Do Not Forget About Other Sources of Income

When calculating your gains, it is important to take into account all your income sources. It means that the investor needs to pay attention to dividends, interest, and bonuses earned during the investment process. Failure to do so will result in your undervaluing your portfolio.

Dealing with Additions and Withdrawals

If there were additions and withdrawals made to the portfolio during the investing period, basic calculation won’t provide an accurate picture of the performance. For that reason, people who invest money usually use such measures as time-weighted return or money-weighted return.

Importance of Accurate Calculations

Calculating the return on investment portfolio makes it easier for the investor to evaluate his/her performance against market standards and decide if he/she needs to change something within his/her investing strategy. It allows the investor to know which securities have been working effectively and those that are not doing well so that adjustments could be made if necessary.

Tracking Returns for Financial Success

The importance of accurately calculating portfolio returns cannot be overstated. This can be done easily by using a simple or a complex approach to finding out one’s returns. By continuously calculating one’s returns and adding all gains, investors get more information on how close they are to achieving their financial objectives.

Connect with Aetram if you want to manage your investments more effectively and track your portfolio like a professional.