Why should I calculate XIRR if I have not invested any additional amounts after my first investment ?
Smallcase investments involve cash flows at different periods even if you have not invested ny amounts post your initial investment. Let’s see how.
Above is the formula that is used to calculate the returns of your portfolio. (DEFINITIONS MANUAL)
If you notice, the denominator has Money Put In and numerator has total returns in Rupees achieved by the portfolio.
Money put In is the total amount you invested from your funds to the Smallcase. Money put can increase indirectly via rebalance if not directly via invest more (lump sums or SIPs)
Money Put In
The money that you actually invest into a smallcase from your broker account (funds). It is the money that goes out from your pocket into the Smallcase.
Though Money Put in will definitely increase when you invest more via the SIP or Lumpsum route, below are a few scenarios explaining the changes in Money Put In during rebalancing.
Case 1 : Buy value : Rs 1000 , Sell Value : Rs 1000
Increase in Money put in : Rs 0
Case 2 : Buy value : Rs 1000 , Sell Value : Rs 2000
Increase in Money put in : Rs 0
Case 3 : Buy value : Rs 1000 , Sell Value : Rs 500
Increase in Money put in : Rs 500
Note : The Money Put In will only increase if there is some amount deducted from the broker funds and added to the smallcase.
Note : Not all rebalances would result in an increase in Money Put In. A snapshot of the scenarios is given in the previous page. Now let us understand this with an example.
Let’s say you invested Rs 100 into a Smallcase & after 30 days, your portfolio returned Rs 20.
Now, the returns should be
Simple 20% right ? (20 / 100) x 100.
Scenario : Let’s assume that the value of buy orders of few of the previous rebalances were greater than that of the sell orders which has resulted in an increase in the Money Put In by Rs 10.
If Money Put In has increased to Rs 110 , your portfolio’s returns would now be : ( 20 / 110 ) x 100 = (+18%) instead of 20%. This addition of funds during rebalanced is not captured by the absolute returns you see on your dashboard. The solution is to set up XIRR which will help you understand the returns.
If you have any further doubts or questions, please send an email to support@weekendinvesting.com
