top of page

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 It measures the actual annualised return of your investment, especially when money is invested or withdrawn at different points of time.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)

Defections from NCP leave Ajit Pawar visibly upset

Updated: Oct 21, 2024

Defections from NCP leave Ajit Pawar visibly upset

Mumbai: Ahead of the Assembly elections, the NCP chief Ajit Pawar is visibly upset. On one hand many of his supporters deserting the party at the same time on the other the seat sharing negotiations are likely to turn acrimonious. Due to which Pawar is sulking.


On Friday, Deepak Salunkhe, a leader from Sangola in Solapur district quit the NCP to join the Shiv Sena (UBT). Salunkhe, a popular face in Sangola was aspiring ticket from NCP. But suddenly crossed over at a function organised at Matoshree, the residence of Uddhav Thackeray.


Prior to this over 600 party NCP workers and officials from the Pune city unit resigned. The agitated workers were protesting the Governor’s decision not to grant an MLC post to Pune City President Deepak Mankar. The development came on the same day when the Election Commission of India announced the schedule for the state assembly election.


Mankar’s supporters gathered at the NCP office in the Narayanpeth area of Pune city on Tuesday evening and held a meeting, where they announced their resignation. The mass resignation included prominent names like city vice presidents, assembly constituency chiefs, various cell heads, and party workers. 


Notably, the city unit had demanded Mankar’s appointment to one of the three MLC seats allocated to the party from the Governor’s quota. However, the NCP chose to re-nominate those with existing family connections to politics. They also prepared a memorandum to be submitted to the party national president and Deputy CM Ajit Pawar, expressing disappointment and disillusionment.


At the same time, the seat-sharing process among the partners of the Mahayuti alliance BJP and Shiv Sena is becoming a tricky business. Every constituent strives to secure a bigger share. Now Ajit Pawar, is bearing the brunt of this sensitive process, as many of his loyalists have quit the party and joined rival factions.


So far till date, over half a dozen NCP senior leaders switched from the NCP to rival parties, with most returning to his uncle Sharad Pawar’s camp. One notable departure that jolted Ajit Pawar was Sanjeevraje Naik-Nimbalkar, the Satara unit chief of the NCP. The royal Naik-Nimbalkar family holds considerable clout in Satara and adjacent areas, and Sanjeevraje’s return has boosted the prospects of Sharad Pawar’s NCP.

Comments

bottom of page