How is portfolio performance calculated?

It is important that we calculate the portfolio performance in a standard and consistent way. Looking at the gains or loss in just few investments will not provide a complete picture of how the portfolio as a whole performed over a long period of time and it certainly does not provide accurate numbers since the investment amount keeps changing and also involves different types of costs.

From last August I have adopted the calculation method based on the following article on fool.com. http://www.fool.com/FoolFAQ/FoolFAQ0056.htm

It is providing a way to accurately calculate the performance. All calculations are based on Total portfolio value, the individual trades are NOT taken into consideration as the value will be part of either Total cash holding or Total Current Holdings value.

Details of the calculations:
1. Calculate current total portfolio value which includes securities holding and cash holdings e.g: Rs. 1,00,000/-.
2. Pick a per unit value e.g: Rs. 100/-
3. Calculate the number of units. e.g: 1,00,000 /100 = 10,000 units.

That is all we need!!

All rows are marked with one of the following: 'Status' - means just recording the values. 'Purchase' - fresh infusion of cash & 'Sale' - means cash was taken out of the portfolio.

Status: Status is added once a week, mostly done on Friday evening. You will need current holdings value, total cash holding & Sensex. Remaining columns like 'performance %s' will be calculated automatically.

Addition of new fund: An infusion of fresh cash to portfolio is considered to be purchase of n units at current price. i.e: Total fresh infusion amount/Current unit price. This will increase the number of units, but leave the current unit price unchanged.

Taking cash out of Portfolio: Taking fund out of the portfolio is considered to be reducing the number of outstanding units.

I typically do the calculation on every weekend. And all the values in the spread sheet except the portfolio value and cash are calculated by the spread sheet itself based on the formula already entered. I also record the index values so that we can see how our portfolio performed compared to broader indexes. Since we are working off of the per unit value, any addition of Added advantage is that since we are taking the total portfolio value (holdings + cash), all the trading costs will be included in it without need for any special calculations. It may looks like lot of work, but in fact it is very easy. Believe me, I have been doing it for couple of months now!! Takes only around 10 mins each week!!

Spread sheet with sample performance calculations:
http://spreadsheets.google.com/pub?key=pn2af8IJJznP5vHgVvpv6UA

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