Are you one of those investors who isolate their portfolio after investing? If yes, then you are making a mistake. Revising and analysing your portfolio regularly is as important as investing itself. When investing in mutual funds, it is important to check your portfolio at least once a year to ensure it is performing up to your expectations. This is nothing but portfolio analysis. Assessing all your investments in the light of your goals to find out whether you are on track to reach them is called portfolio analysis. Read on to find out what does portfolio analysis mean and what are its tools.
Assessing all your investments to see if their performance is meeting your goals, requirements, and resources is a portfolio analysis. In other words, it means you are assessing your portfolio based on whether you are progressing towards your goal or not.
Doing a Portfolio analysis means to take decisions that will help improve the return of your portfolio. As an investor, it is essential that you analyse your portfolio regularly to ensure you are progressing towards your goals. If you find any discrepancy, you can rebalance your portfolio to get back on track to achieve your goals.
If you are investing in mutual funds, monitoring your portfolio regularly is important. But what exactly does monitoring a portfolio involve?
Mutual fund portfolio analysis involves assessing the performance and risk of all the funds in a portfolio. The performance is measured in absolute terms and relative terms. In other words, you will have to check the fund’s returns in isolation. Additionally, you will have to also compare it with each fund in the portfolio, its peers in the category and the benchmark.
By doing so, you can identify the poor-performing fund in your portfolio. Moreover, you can also switch your investment to a better-performing fund before you lose more money.
In case your portfolio is doing well and there are no poor-performing funds, then you will be reassured that you are a step closer to achieving your financial goals.
Portfolio analysis starts right from when you first invest and continues until you redeem all your investments. There are four major steps to analysing a portfolio.
Step 1: Revisit or Define investment objectives and understand your resources and requirements
When you began your investing journey, you must’ve already defined your investment goals. If not, it’s not too late to define them. Determine what your goal is and at what time you want to achieve them. If you already defined your goals, revisit them and if there are any changes, then adjust the existing goals accordingly.
Next, determine what is your risk tolerance if you haven’t already. Investing based on your risk tolerance will help determine an optimum portfolio.
Finally, determine what resources you have. Based on the funds you have and the liabilities you owe, you will know whether to invest an additional amount or not.
Step 2: Determine asset allocation and benchmark
The next step of portfolio analysis is to determine your asset allocation. This means how much fund you will allocate to each asset. You can determine your asset allocation based on your goals, tenure, and risk tolerance levels.
Next, based on the asset allocation, determine a benchmark that will act as a standard for comparing your portfolio’s performance. You can also track your portfolio’s performance against the benchmark’s performance. Compare the one year, three-year, and five-year returns of your portfolio with that of the benchmark to see how is your portfolio performing.
Step 3: Check the portfolio’s performance in light of the objectives
Check your portfolio’s return and compare it with the benchmark. In the case of mutual funds, a benchmark is already mentioned in the fund documents. You can read the scheme information document (SID) or key information memorandam (KIM) that the fund house publishes when launching the fund to know its benchmark.. So, compare the fund’s performance with the benchmark and category peers.
By assessing the fund’s performance with that of the benchmark and peers, you will know whether your investments are performing good or bad.
Step 4: Rebalance the portfolio if required
If your portfolio performs better than the benchmark and its peers, you are on track toward your financial goals. If not, you might want to replace poor-performing investments with better ones. While picking the replacements, ensure they align well with your goals, risk tolerance and predefined asset allocation. This will ensure you are invested in the right investments that suit you and are on track towards achieving your goals.
Analysts use multiple tools to analyse a portfolio and do a thorough investment analysis. Some of them are given below.
Holding period return is the total return of a portfolio over a period of time. It is expressed in percentage and gives the return for the tenure you held in your portfolio.
Formula to calculate holding period return:
Holding period return of an investment = ((Ending value + Beginning value) + Dividends)/Beginning value
Holding period return of a portfolio = ((1+x1)*(1+x2)*(1+x3)…*(1+xn)) – 1
Where x1, x2, and xn are the return of multiple investments.
Let’s understand this with an example. Suppose your portfolio has 5 investments, giving 9%, 10%, 12%, -8%, and 6%, respectively. Holding period return of your portfolio is
Holding period return = ((1+0.09)*(1+0.1)*(1+0.12)*(1-0.08)*(1+0.06)) – 1
Holding period return = 30.96%
This is your portfolio’s total holding period return over a given period.
It is the average return of your portfolio per annum. It is calculated by simply taking an average of returns of all investments.
In the above example, let’s say the return of different investments is their annual return. The average return of the portfolio is 5.8% ((9%+10%+12%-8%+6%)/5).
This means every year your portfolio gives you a 5.8% return. This average can easily be compared to benchmark and other portfolio returns.
Alpha is the excess return of an investment over its benchmark or market. It is also known as an abnormal return as markets are considered to be efficient, and no investment can give market-beating returns. Alpha is calculated by subtracting the market return from the portfolio return. The higher the return,
Alpha = Portfolio return – market return.
Let’s understand this with the help of an example. Suppose the market return is 12%, and your portfolio return is 15%. The alpha or abnormal return is 3% (15%-12%). This means your portfolio is performing better than the market.
The risk-adjusted return of a portfolio is the Sharpe ratio. In other words, it is the measure of the performance of a portfolio over a risk-free asset after adjusting for risk. The higher the Sharpe ratio, the better the portfolio’s performance. It also tells whether the portfolio’s excess returns are due to smart investment decisions or simply luck or risk.
Sharpe ratio is calculated using the formula below:
Sharpe ratio = (Rp – Rm)/std dev of portfolio
Where,
Rp is the return of the portfolio
Rm is the return of the market of the risk-free asset
Information ratio calculates the excess return of a portfolio over its benchmark after adjusting for tracking error. A high information ratio indicates the portfolio consistently beats the benchmark with low tracking error. In contrast, a low information ratio indicates the failure of the portfolio manager to give market-beating returns at a certain risk.
The information ratio is calculated using the formula below:
Information ratio = (Rp – Rb)/tracking error
The Sortino ratio is the excess return of a portfolio over the risk-free asset adjusted for the downside risk of the portfolio. Since it considers only the downside standard deviation, it gives a better picture of the risk-adjusted return. The higher the Sortino ratio, the better the portfolio’s p
Sortino ratio is calculated using the formula below:
Sortino ratio = (Rp – Rm)/downside std dev of portfolio
Rp is the return of the portfolio
Rm is the return of the market of the risk-free asset
Periodical assessment – Through portfolio analysis, you can monitor your portfolio regularly and ensure that you are on track to achieve your goals. By doing so, you can make changes to your portfolio, if necessary.
Helps achieve financial goals – By tracking your investment progress regularly, you can check if you are closer to achieving your goals. If you find any deviation, you can easily get back on track by changing your portfolio.
Helps make informed decisions – Through portfolio analysis, you will know the risk-adjusted return you are earning. You will know exactly the amount of risk you are undertaking to earn a certain return. With knowledge about this, you can make informed decisions.
Realigning investment portfolio – Through portfolio analysis, you can separate the underperforming investments from the good ones. This will help you replace the underperforming ones with outperforming investments.
Portfolio analysis involves assessing your investments. It is a very important part of your investing journey. By monitoring your portfolio regularly, you can achieve your financial goals. Review your investment portfolio periodically, at least once a year to ensure you are on track to achieve financial independence.
Happy Investing!
How to evaluate mutual funds?
Mutual funds can be evaluated based on their performance. You can estimate the fund’s returns and compare them with a benchmark or its peers. Tools such as Sharpe, Sortino, and information ratios can be used to estimate the fund’s risk-adjusted returns.
How often should I conduct portfolio analysis?
You should review your mutual fund portfolio at least once a year. Evaluate the fund’s performance in light of your goals to know whether your portfolio is helping you progress towards your goals.
What parameters apart from return should you consider to evaluate a mutual fund?
Apart from returns, you can check a fund’s portfolio, turnover ratio, expense ratio, and fund manager’s experience to evaluate a mutual fund.
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Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.
Prithvi Raj Tejavath is currently the Business Head - Investments at Jupiter Money, where he leverages his extensive experience in product marketing, business growth, and leadership. Prior to this, he held the role of Chief Product Marketing Officer and Chief Product Officer at Scripbox, a leading digital wealth management platform. His journey at Scripbox began after the acquisition of Upwardly, a company he co-founded, where he served as CPMO overseeing product and marketing. At Upwardly, Prithvi played a crucial role in making investment opportunities more accessible to a broader audience.
Before Upwardly, Prithvi was Vice President of Category Management & Growth at Urban Ladder, where he managed the P&L for their furniture, décor, and mattress divisions, and successfully launched the Decor and Mattress business units. Earlier in his career, he founded BuynBrag.com, India's first social shopping website focused on home and lifestyle products. Under his leadership, BuynBrag was acquired by Urban Ladder in September 2014.
With a background in online product management, growth strategy, and marketing, Prithvi has consistently demonstrated his ability to scale businesses and drive innovation across sectors. His entrepreneurial spirit and strategic acumen continue to shape his contributions to the financial and investment landscape.
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