How to Calculate Portfolio Returns?
- 6 min read
Creating an investment portfolio is a strategic way to grow your finances over time. Investors need to calculate the returns on their portfolio—without this insight, investing loses its purpose. Knowing your portfolio’s performance puts you in a stronger position to plan your next steps.
The good news is, you do not need a financial advisor or math expert to do this, as you can calculate your returns yourself. This blog provides a step-by-step guide on how to calculate portfolio returns with relevant examples.
What are Portfolio Returns?
Before you know how to calculate the return on a portfolio, you must understand its concept. Portfolio return is the total gains and losses made by an investment portfolio that consists of various assets. This is the typical result you gain or lose from your investments over time.
Moreover, you may be familiar with a term known as expected return. Although it sounds like a portfolio return, it is a well-informed and data-driven estimate of how much you can gain or lose from your invested assets.
How to Calculate the Expected Portfolio Returns?
The formula of portfolio returns considers the weight of each asset in the portfolio and its returns.
Portfolio returns = Σ(wi x ri)
In this formula, ‘wi’ is the weight of each asset in the portfolio and ‘ri’ is the return of it.
The amount of money you would have gained or lost over a certain period if you had invested in an asset is measured by its rate of return. For instance, you invested INR 2000 in a stock over a year and then sold it. You would have earned INR 300 as a return after the sale of the shares. This stock would have had a 0.15% rate of return.
Step-By-Step Process to Calculate Portfolio Returns
Calculating your portfolio returns is crucial because by doing so, you can see a comprehensive picture of the performance of your investments. Below is a step-by-step guide on how to calculate the portfolio return:
- Step 1: Identify each of your portfolio’s assets and calculate their rate of return.
- Step 2: Now, find the weightage of each of your assets. The weightage is the ratio of the amount invested in each asset to the amount invested in your entire portfolio. The result can be converted to a percentage or left in decimal form.
- Step 3: Multiply the outcome of step 1 by the outcome of step 2 to assign the weights to each asset. Keep in mind that you must do this calculation for every asset.
- Step 4: Finally, add up the outcome by multiplying the weight and the return of each asset.
Portfolio Return Calculation Examples
To understand the calculation of portfolio returns with ease, have a look at these examples.
Example 1
The table below shows an example of portfolio return calculation if you know the returns:
| Type of Asset | Invested amount in INR | Weightage (Wi) | Returns (Ri) | Portfolio returns {Σ(wi x ri)} |
| Shares | 2,00,000 | 0.60 | 10% | 6% |
| Mutual Funds | 3,00,000 | 0.75 | 12.5% | 9.37% |
| Total | 5,00,000 | Portfolio Returns | 15.37% | |
Example 2
Sometimes, you do not get the returns of each of your invested assets. You have to find it by dividing the invested amount by the final market value of it. To get clear, check the table below:
| Type of Asset | Invested amount in INR | Final Market value in INR | Gain or Loss in INR | Weightage (Wi) | Returns (Ri) | Portfolio returns { Σ(wi x ri)} |
| Shares | 2,00,000 | 2,10,000 | 10,000 | 0.40 | 0.05% | 0.02% |
| Mutual Funds | 3,00,000 | 3,50,000 | 50,000 | 0.60 | 0.16% | 0.10% |
| Total | 5,00,000 | Portfolio Returns | 0.12% | |||
Impact of Portfolio Returns on Investors
Knowing your portfolio returns can help you manage your investment and take further steps to increase your returns. The following pointers show the impact of portfolio returns on investors:
- Portfolios generate returns as per the investment strategy taken by the investors. Therefore, portfolio returns help investors assess the overall performance of their portfolio and the execution of their strategy.
- Investors can compare their returns with the benchmark returns. This can help them to measure the performance of the assets they have in their portfolio.
- They can even compare their portfolio risks with portfolio returns.
- Understanding your portfolio returns can make the financial planning of investors easier.
Relationship Between Portfolio Returns and Rebalancing
Now that you know how to calculate the return of a portfolio, you should know the relationship between portfolio rebalancing and returns. Investors frequently assess their portfolios once a year and make the necessary changes to align them with their financial objectives.
For instance, you may decide to transfer some of your gains into a value-focused fund if you see notable growth in a certain fund, such as a growth-oriented investment. This approach anticipates a market shift in which value investments may become more popular with other investors.
Final Thoughts
Understanding how to calculate portfolio returns is important to know the overall performance of your chosen assets. A portfolio return is the total gain or loss you have made investing in various assets.
Knowing your portfolio returns, you can compare them with the benchmark returns. However, you must diversify your investment portfolio to reduce the risk.
Want to build a diversified investment portfolio with stocks, bonds, and mutual funds? Download the PL Capital Group – Prabhudas Lilladher application and open a Demat account for free! PL Capital also offers you portfolio management services with experienced investment experts.
Frequently Asked Questions
1. How to calculate the total return of my portfolio?
Calculation of the total returns of your investment portfolio is easy. You have to find the weightage of each of your invested assets and their returns. You have to multiply the weightage and returns of each asset. Add up the outcomes to find out the total returns of your portfolio.
2. Which common mistakes should be avoided when calculating portfolio returns?
While calculating your portfolio returns, you must avoid mistakes like not including the reinvested dividends, overlooking transaction costs, neglecting the risk-adjusted returns, and ignoring the tax implications.
3. How frequently should I calculate my portfolio returns?
It depends on you when you should get your portfolio returns, However, it is better to calculate it annually.
4. What impact do changes in the market have on the calculation of portfolio returns?
Changes in the market may lead to inaccurate results and predictions while calculating the expected returns of your portfolio.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
