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 It measures the actual annualised return of your investment, especially when money is invested or withdrawn at different points of time.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

Konkan’s Election Dilemma: Progress or Preservation? 

Updated: Oct 22, 2024

Konkan

The Chipi Airport, a gleaming gateway to Sindhudurg district which was inaugurated in 2021, has inspired hopes of an economic transformation in the Konkan region. For decades, locals have migrated to Mumbai and Pune in search of better employment opportunities, but the promise of economic growth, driven by enhanced connectivity, has kindled optimism.


Yet as the region prepares for the Assembly polls on November 20, the airport is but one part of a mosaic of political and economic issues. In every election cycle, voters in this coastal stretch of Maharashtra grapple with a familiar dilemma: the potential benefits of development versus the costs to their cherished natural environment. The potential for new jobs and entrepreneurial ventures in tourism and agriculture offers a tantalizing glimpse of a future in which the Konkan need not rely solely on its distant cities for prosperity.


While Chipi heralds new opportunities, the larger debate on development in the Konkan revolves around more controversial projects, none more divisive than the Ratnagiri Refinery and Petrochemicals Ltd (RRPCL). The proposed mega-refinery at Barsu, projected to bring investment and thousands of jobs to the region, has instead ignited fierce protests.


The ruling Mahayuti coalition led by Chief Minister Eknath Shinde and the Bharatiya Janata Party (BJP) had largely remained cautious over openly discussing the refinery during the Lok Sabha polls even when both Shinde and Deputy CM Devendra Fadnavis had expressed keenness in reviving the Rs. 3.5 lakh crore oil refinery project at Nanar which the opposition Uddhav Thackeray-led Shiv Sena (UBT) has strenuously opposed.


The refinery project had earlier been scrapped by then CM Fadnavis (2014-19), following opposition from the BJP’s then ally, the Thackeray’s undivided Shiv Sena. Thackeray’s Sena (UBT) has now positioned itself as the guardian of the environment, calling for sustainable development that aligns with local sentiment.


The Konkan’s environmental credentials are strong, and its history of opposing large industrial projects, such as the Dabhol power plant and the Jaitapur nuclear project, remains fresh in the minds of its people. Anti-refinery protestors argue that their livelihoods, rooted in agriculture and fishing, would be irrevocably harmed by pollution from the refinery, just as previous generations fought to protect the region from industrial encroachment.


The BJP’s strongman in this region is Narayan Rane, the Union Minister for Micro, Small, and Medium Enterprises, who had won the Ratnagiri-Sindhudurg Lok Sabha constituency in the general election in June by trouncing the Shiv Sena (UBT)’s candidate and former MP Vinayak Raut.


Rane has championed industrial development, but even his stance on the refinery remains carefully calibrated to avoid alienating local voters.


Then again, besides big industrial projects, many Konkan residents demand more investment in sectors like agro-processing, fisheries and eco-tourism (for which the region offers ample opportunities) to ensure sustainable, long-term growth.


Konkan’s voters want growth, but they demand that it comes on their terms. In this election, as in many before it, the question remains can Maharashtra’s leaders deliver progress without sacrificing the natural and cultural wealth that makes the Konkan unique?

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