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Investment Performance; A complete guide

A financial advisor generally calculates Investment performance before advising an investor to put money on a financial scheme. The calculations of investment performance can prove to be a challenge if you are not thorough with the fundamentals of the concept. Read on for all the details that you must be aware of.

What Is Investment Performance?

Any return on an investment listing containing a single asset or multiple assets is known as an Investment Performance. It allows you to realise the significance of the returns you gain on your investments. A return is nothing but either the monetary gain or loss reflecting in your portfolio. Thus, investment performance can be determined for any given period and that too in a specific currency. A positive performance result is always expected from a positive return. Apart from the positive performance result, a negative return also plays a crucial role in shaping your portfolio. It is responsible for the loss of money in your collection highlighting the negative performance in your investment portfolio.

In the capital market, the term Return has been classified into numerous categories to allow investors to trade in the market effectively. The term Return is categorised by a distinction between the total return and the price return. The former is responsible for taking into account income, whereas the latter is only responsible for capital appreciation. To calculate the investment performance, an investor needs to consider any particular currency over a period. Therefore, the total return depends on the income, but the price return depends on capital appreciation.

It is crucial to disclose the investment performance results completely to the investors to ensure transparency in the market. For a positive result, a performance presentation is created for the investment manager to follow the ethical standards to provide perfect representation. It created a sense of requirement for a set of guidelines to make profits for the investor by a firm. Thus, the creators of Global Investment Professional Standards (GIPS) took the responsibility to provide the marketers with an accurate solution. The creators of GIPS are Chartered Financial Analyst Institute and governed by the GIPS Executive Committee contributing to increased profits of the firm.

What Are the Concepts of Return on Investment and Risk?

Return on Investment (ROI) and Risk are the two key players in finance and accounting working for the development of a business. ROI does the expression of the profit percentage of the initial investment to calculate the revenue accurately. Thus, the concept of return on investment and risk works on the possibility of danger that your investment might lose money. So, to achieve the mark of successful investment, you need to establish the right balance between risk and return.

Since the introduction of return and risk in the market, the method to determine your potential return has been developed accordingly. Therefore, to generate the desired output, you need to examine and calculate the amount of risk you take carefully. It is imperative to monitor your risk as even a slight miscalculation can lead you to lose your money. Thus, achieving a better understanding of the concept of potential returns and risk can help you to evaluate investment opportunities. Moreover, it also allows you to make informed and effective decisions contributing to the growth of your firm.

Types of Investments

There are numerous types of investments tools available in the market to help you achieve your desired financial goals. Out of all the different types, the extensive investment type is significant as they vary from bank products to stocks and bonds. These types of investments follow their own set of features, risk factors, and ways in which investors can use them. To achieve a better understanding of investment tools, you can refer to some of the tools of investment given below:

  • Stocks: According to the actual strength of the firm, stocks are extensively available in the market contributing to the firm's performance. It helps to boost the performance during market cycles and potential for short as well as long term growth.
  • Bonds: It is an understanding between a creditor and a debtor where the creditor invest a specific capital in exchange for interest payments. The payment needs to be done over a specified term along with repayment of the principal amount at the bond's maturity date.
  • Cash equivalent: This type of investment safeguards your original investment so that you can access your money at any given time. Thus, cash equivalent investments are not advised for long term investment goals like retirement goals.
  • Investment Funds: There are numerous funds in the market like mutual funds, closed-end funds, exchange-traded funds, etc. with a clear objective to pool money from investors. After collecting the capital from investors, funds are invested according to a specific investment strategy. Furthermore, funds offer you diversification, professional management and an extensive variety of investment strategies and styles.
  • Annuities: It is an agreement between an insured and an insurance company, where the insurance company guarantees to make payments periodically. Therefore, the payment can start with an immediate effect, or it can initiate after some time in the future. If the payment is received immediately, it is known as an immediate annuity; and if the amount is started after a specific time, it is known as a deferred annuity.

How to Calculate Your Investment Return?

The two widely used formulas to calculate Return on Investment (ROI) are given as follows:

  • ROI = Net Income / Cost of Investment
  • ROI = Investment Gain / Investment Base

Among the two, the first version of the ROI formula is most extensively used by marketers worldwide. The most simple way to remember the ROI formula is to divide Benefit by the Cost. So, it is imperative to measure the ROI very carefully to identify whether the ROI is good or bad.

Which Investments Have the Best Returns?

Top 9 Investments Known for Their Best Returns Worldwide

  • Direct Equity
  • Equity Mutual Funds
  • Debt Mutual Funds
  • National Pension System (NPS)
  • Public Provident Fund (PPF)
  • Bank Fixed Deposit (FD)
  • Senior Citizens Savings Scheme (SCSS)
  • Real Estate
  • Gold

What is Investment Portfolio Management?

Investment Portfolio Management is the technique of accumulating and managing different investments to fulfil specific requirements. You can analyse various factors like management strategy choices, asset allocation, investing strategies, and risk management to maintain an investment portfolio. You can understand the concept of investment portfolio management with the help of the following example:

If you are planning to invest in stocks or mutual funds, you can invest in the shares of your choice. Moreover, you get to choose from a lot of listed companies to increase the chances of your profit. Now, these investments are widely known for their levels of risks and varying degrees of returns. Due to the availability of a wide range of choices of investments, the chances for the investor to succeed increases accordingly. Moreover, to increase your chances of success, you need to adopt several strategies according to the specific economic situation.

How Do We Measure the Performance of a Portfolio Manager?

To measure the performance of a portfolio manager effectively, the marketers came up with the three most popular methods known worldwide. These three methods combine risk and return performance into a single value varying slightly from one another. The three methods can be described as the Treynor, Sharpe, and Jensen ratios.

  • Treynor Measure: Its primary objective is to determine the capacity of a performance measure affecting the investors regardless of their risk preferences. According to Treynor, there are two components of risk: the risk produced by fluctuations in the stock market and the risk arising from the changes of individual securities.
  • Sharpe Ratio: The Sharpe ratio is almost similar to the Treynor method except for one distinctive feature. In the Sharpe ratio, the risk measurement is the standard deviation of the portfolio rather than considering only the systematic risk. Therefore, this method strongly emphasises on the Capital Asset Pricing Model (CAPM) and evaluates total risk to identify the portfolio.
  • Jensen Measure: The Jensen measure also depends on the CAPM method to evaluate the risk and calculate the return for a business. This method is also known as Alpha as it calculates the excess return generated by a portfolio over its expected return.

Why Should You Monitor the Value of Your Investment?

In the field of accounts and financing, monitoring the value of your investment is considered to be a great practise. It is because evaluating the reports using the information in financial planning has a great significance in the growth of a business. It allows you to calculate the future value of your investment and plan accordingly to earn maximum profits in the market. Thus, the idea of monitoring your investment helps you to understand if you are making or losing money in the business.

Can I Improve My Investment Performance?

3 Ways to Improve Your Investment Performance

  • Price Action Strategies: According to this strategy, you can purchase a stock at a lower price and re-sell it at a comparatively higher rate. Thus, you need to re-sell the stock at a later date allowing it the time to boost its value in the market.
  • Investment Dividends: It is the fixed income that an organisation provides you with in exchange for using your money. Therefore, this method contributes to your sustainability as it benefits you with a stable income.
  • Call Revenue: A call revenue is an amount you receive by an investor when you sell a covered call against your stock.

Textbooks On Investment Performance

Book 1

Investment Performance Attribution: A Guide to what it Is, how to Calculate It, and how to Use it

Published by McGraw Hill Professional in 2003

By David Spaulding (Author)


Book 2

Investment Performance Measurement: Evaluating and Presenting Results

Published by John Wiley & Sons in 2009

By Philip Lawton, CIPM, Todd Jankowski, CFA (Authors)

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