We are tracking your portfolio performance through a NAV based approach. How does it work?
NAV Based Approach is the Best for of Measuring Portfolio Performance
NAV is the best way of calculating returns when investments are made at different times and portfolio value keeps changing.
On 01st August 2017
You start with Portfolio Value of Rs. 1,00,000. Number of units assigned is 1000 units based on an NAV of Rs 100 per unit. Units is calculated as – Value of Investment/NAV. In the current example, with the portfolio value of Rs.1,00,000, NAV of Rs 100 as on 01/08/2017, total number of units allotted is 1000.
Portfolio value = NAV * Units Outstanding
Portfolio value – 100*1000 = Rs.1,00,000
On 02nd August 2017
You decided to add more money (Rs. 50,000) . On the day you added that amount, theoretically you had to purchase 500 units at Rs .100 to invest in the portfolio.
The number of units in your portfolio now increases to 1500 (1000 initial shares plus the 500 now added) and the value of your portfolio increased to 1,50,000 (1500*100). However, the NAV has not changed and remains at Rs. 100.
Why didn’t the NAV change even though we added money to the portfolio?
NAV is a measure of portfolio performance and not the amount of money in your portfolio. By adding or subtracting money, your portfolio performance didn’t change. In other words, you didn’t create value by adding money in your own portfolio, you merely increased the size of your portfolio.
On 31st August 2017
The total value of all the shares in your portfolio has now risen to Rs.2,25,000. However, the number of units remained unchanged from 02nd August 2017 at 1500 and NAV of each unit now is Rs.150.
So how well did your portfolio do in the span of one month?
Initially the portfolio started with an NAV of Rs. 100 and closes the month at an NAV of Rs.150. There is a 50% rise in the NAV over a month which basically means that your portfolio gave you returns of 50% over the month.
Compare that to the benchmark, ie either Sensex or Nifty for the same period and you have your return as against the benchmark. Easy to know if your portfolio has outperformed or underperformed the benchmark.