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By:

Kaustubh Kale

10 September 2024 at 6:07:15 pm

Absolute Returns v/s XIRR

When investors evaluate any investment, the first number they usually think of is the “profit”. What extra have we earned? Naturally, this feels exciting. But the important question is: does this number truly reflect how well your money has worked for you? This is where investors must understand the difference between absolute returns and XIRR. This difference is important across asset classes - whether it is a stocks portfolio, mutual funds portfolio, insurance product, LIC plan, real...

Absolute Returns v/s XIRR

When investors evaluate any investment, the first number they usually think of is the “profit”. What extra have we earned? Naturally, this feels exciting. But the important question is: does this number truly reflect how well your money has worked for you? This is where investors must understand the difference between absolute returns and XIRR. This difference is important across asset classes - whether it is a stocks portfolio, mutual funds portfolio, insurance product, LIC plan, real estate, or any other investment product. Absolute Returns Absolute return is the simplest (hence, misleading) way of measuring profit. It only tells you how much your investment has grown compared to the amount invested. For example, if you bought a property for ₹1 crore and its value became ₹2 crore, your absolute return is 100%. You invested ₹1 crore and made a profit of ₹1 crore. But this number does not tell the full story. The more important question is: how much time did it take? If the same property doubled in five years, it would be excellent. But if it doubled over ten years, the annual return is much lower. In fact, ₹1 crore becoming ₹2 crore over ten years roughly translates to around 7% annualised return. Suddenly, the same 100% absolute return does not look as impressive. XIRR Importance XIRR stands for Extended Internal Rate of Return. It measures the actual annualised return of your investment, especially when money is invested or withdrawn at different points of time. In stocks, XIRR helps measure multiple buy and sell transactions. In mutual funds, it helps measure SIPs, lump sum investments, switches, and redemptions. In insurance and LIC plans, it helps understand the real return after considering premiums paid over the years and the maturity value. In real estate, it helps compare the final value with the purchase price, holding period, and multiple cash flows. This happens very often in real life, across multiple asset classes - multiple entries and exits of money. In such cases, absolute return can become misleading because it ignores timing. XIRR considers three important things: how much you invested, when you invested, and what the current value is. It gives a more realistic picture of how efficiently your money has grown. Real Purpose The real purpose is to beat inflation, grow net worth, create wealth, and achieve financial goals. If inflation is around 6% to 7%, your investments should ideally generate returns above that. If we also consider lifestyle inflation, the required return may be even higher. Education, healthcare, housing, travel, and daily expenses are all becoming costlier over time. Therefore, do not overestimate returns by looking only at absolute numbers. Absolute returns may make you feel good, but XIRR tells you the truth. For your wealth creation journey, XIRR is one of the most important numbers to track. It tells you whether your money is truly working hard, whether your portfolio is beating inflation, and whether your financial plan is on the right track. (The author is Chartered Accountant and CFA (USA). Financial advisor. Vies personal. He could be reached on 9833133605)

Choking Mumbai

For decades, Mumbai was perceived as a rare urban oasis, where the saline sweep of the Arabian Sea blunted the worst ravages of India's air pollution. That illusion has now been dispelled. A meticulous four-year study by Respirer Living Sciences (RLS), using data from its AtlasAQ platform, reveals the bleak truth that the city’s air is thick with pollutants all year round, with no ‘clean season’ left.


Mumbai’s annual average levels of PM10 (particulate matter ten microns or less in diameter) have consistently breached the national safety threshold of 60 micrograms per cubic metre (μg/m³). This is not merely a seasonal malaise tied to cooler winter months, as once assumed. Alarmingly, the city’s pollution levels persist even through the hot season, a time when improved atmospheric dispersion should offer natural reprieve.


Across the city - from Chakala in Andheri East to Deonar, Kurla, Vile Parle West and Mazgaon - pollution has become an unrelenting, ubiquitous presence.


The culprits are well known: traffic emissions from a burgeoning number of vehicles; unregulated dust from frenzied construction; industrial activity in and around the ports; and a conspicuous lack of dust control measures. Mumbai’s ceaseless growth now risks becoming a chronic liability.


Worryingly, the regulatory response remains sluggish. Mumbai’s urban planning continues to treat clean air as a peripheral concern, not a foundational necessity. Development plans rarely integrate environmental impact assessments in a meaningful way.


A sharper, citywide strategy is urgently needed. Dust suppression rules at construction sites must be enforced strictly, with financial penalties for violators and incentives for best practices. Traffic management systems should be overhauled to ease congestion and encourage the use of public transport. Expansion of clean, reliable mass transit network needs to be urgently prioritised. In addition, comprehensive real-time air monitoring at the ward level should be deployed, enabling authorities to respond to localised pollution spikes swiftly rather than relying on citywide averages that conceal dangerous hotspots.


Longer-term, clean air targets must be hardwired into the city’s master planning and transport policies. Green buffers along major traffic corridors, stricter emission norms for commercial vehicles and incentives for rooftop gardens and urban afforestation could all play a part. Industrial zones near port areas should be subjected to rigorous air quality compliance measures, not token self-certifications. Private developers and large infrastructure firms, often among the worst offenders, must be made stakeholders in the clean air mission through binding regulations.


Mumbai’s commercial dynamism - as a magnet for migrants, entrepreneurs and investors - depends not just on glittering skyscrapers but on something far more basic: the ability to breathe. Unless clean air becomes an unshakeable priority, the city risks suffocating its own future. For a metropolis that prides itself on its resilience against terror attacks, monsoon floods and economic shocks, the real test will be whether it can muster the will to fight an invisible, pervasive enemy slowly corroding the lives of its 20 million citizens.

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