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 It measures the actual annualised return of your investment, especially when money is invested or withdrawn at different points of time.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

India’s Dilemma: The Specter of a Three-and-a-Half-Front War

Updated: Jan 2, 2025

In the first of a two-part series, we examine India’s growing security challenges, both internal and external, and the strategic steps needed to navigate these complexities

India’s Dilemma

The world is a powder keg. Unrest in Iran, Iraq, Israel, Syria, and across the Middle East coincides with the protracted war between Russia and Ukraine. These crises ripple across borders, leaving no country untouched. For India, the stakes are particularly high. In Asia, tensions with Bangladesh and Pakistan, coupled with an unresolved standoff with China, exacerbate an already precarious security environment. Adding fuel to the fire, domestic challenges further intensify the risks, raising the alarming possibility of what strategists dub a “three-and-a-half-front war.”


India’s geographical location offers both an advantage and a disadvantage. Strategically positioned as a hub for global logistics, the country is critical to ensuring regional stability. Yet, its proximity to two longstanding adversaries—China and Pakistan—complicates matters. Bangladesh, with its shifting allegiances, has added a new dimension to this calculus. The volatile domestic situation, marked by communal and political unrest, completes the trifecta, with internal challenges forming the “half front” in this ominous scenario.


Indo-China relations have long tested India’s diplomatic mettle. For decades, China has pursued a strategy to keep India on edge, using a mix of psychological and military provocations. Rooted in its desire to avenge the ‘Century of Humiliation,’ China’s worldview is deeply shaped by a need to dominate its regional neighbours.


India’s rapid ascent on the global stage poses a direct challenge to China’s ambitions of regional and global supremacy. Beijing views New Delhi’s rising stature with unease, particularly its growing influence in the Indo-Pacific, its robust infrastructure along contested borders and its leadership in multilateral forums like the Quadrilateral Dialogue (QUAD). The refusal to join initiatives like the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP) has further strained ties.


The 2020 Galwan Valley clash, a tragic flashpoint in Indo-China relations, epitomized China’s aggressive designs. Beijing’s displeasure with India’s border infrastructure development and its closer ties with Western allies has only fuelled its belligerence. Militarily, China holds the upper hand, leveraging its advanced arsenal against India’s aging defence systems. This disparity emboldens Beijing to test India’s resolve repeatedly, creating a perpetual state of tension.


Beyond its direct provocations, China’s deepening ties with South Asia complicate India’s security calculus. Bangladesh, once a trusted ally, now edges closer to Beijing. Economic investments through the Belt and Road Initiative, strategic military partnerships, and increased political engagement hint at a significant shift in Dhaka’s priorities. While India continues to invest in its ties with Bangladesh, the growing influence of China in the region presents challenges that are impossible to ignore.


Since Partition in 1947, India and Pakistan have shared an acrimonious relationship. Pakistan’s grievances, from the creation of Bangladesh to its inability to annex Kashmir, have defined its hostile posture toward India. While India’s economic growth and diplomatic successes have widened the gulf, Pakistan continues to rely on asymmetric warfare through state-sponsored terrorism.


India has responded firmly with cross-LoC strikes and diplomatic efforts like pushing Pakistan onto the FATF grey list. However, Islamabad’s deepening ties with Beijing, including advanced weapon supplies, have strengthened its military, forging a troubling China-Pakistan nexus. This partnership, with potential strategic collaboration in Siachen and Ladakh, poses a serious challenge to India, raising concerns of a coordinated assault from both adversaries.


Bangladesh, once a close ally, now emerges as a wildcard in India’s security landscape. While the two countries share historical ties rooted in India’s role during Bangladesh’s liberation, recent developments suggest a drift. Dhaka’s growing economic partnership with Beijing and its reluctance to fully endorse India’s regional leadership underscore this shift.


China’s significant investments in Bangladesh’s infrastructure, ranging from ports to power plants, mirror its strategy in other South Asian countries. For India, this growing influence represents not just an economic challenge but a strategic one. The possibility of Bangladesh aligning with China in regional disputes adds another layer to India’s external threats.


The Domestic ‘Half Front’

India’s security challenges are compounded by internal issues like communal tensions, political polarization, and insurgencies in Kashmir and the Northeast, which strain resources and create exploitable vulnerabilities. Kashmir remains a flashpoint, with unrest offering Pakistan opportunities to stoke proxies, while Northeast insurgencies require constant vigilance. To counter the threat of a coordinated three-front assault, India must recalibrate its security policy with investments in defence modernization, strong alliances, and diplomatic finesse.


Modernizing the armed forces, with a focus on indigenization and reducing dependence on foreign suppliers, is imperative. Simultaneously, India must strengthen its regional partnerships, leveraging platforms like the QUAD and the Indian Ocean Rim Association to counterbalance China’s influence. Engaging with Bangladesh to rebuild trust and counter Beijing’s narrative will be equally crucial.


A united and resilient nation is less susceptible to external manipulation, ensuring that the ‘half front’ does not become a full-blown crisis. The challenges are formidable, but so too is India’s resolve.


(The author is a retired Indian Naval Aviation Officer and a geo-political analyst.


(In Part Two tomorrow, we focus on Bangladesh’s potential to emerge as a third front in the conflict, explore how India’s domestic situation constitutes a ‘half front’ and examine key remedial measures India must adopt to mitigate the threat)

Comments


bottom of page