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5 ways to assess Market, Portfolio performance
Nothing in the world can be judged without a comparison. Even numbers are considered to be positive or negative on the basis of whether they are more than or less than 0.
This applies to the market or your Portfolio performance too. You will never be able to review whether your returns were high or low without something to compare against.
This is called as Relative Performance. Here are five aspects you need to consider while evaluating returns:
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Benchmark index
The BSE Sensex and NSE Nifty are considered benchmark indices. They are considered to reflect the market sentiment. So, most portfolio returns are compared with the Sensex or Nifty’s return. If your portfolio gave a higher return, it’s called ‘outperforming the market’.
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Size
In the stock market, companies are divided on the basis of their market capitalisation. This depends on the size of the company. Larger the net worth, higher will be the market capitalisation. The Sensex and Nifty are formed by large companies or ‘large-caps’. There are indices for smaller and medium sized companies too, called ‘smallcaps’ and ‘midcaps’ respectively. If you Portfolio consists of relatively smaller companies, it makes more sense to compare with the BSE Smallcap or Midcap or the NSE Smallcap or Midcap indices.
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Sectors
Not every industry reacts to external economic situations in the same way. Some may do well. It makes sense to select stocks accordingly depending on the economic scenario. For this, you need to understand how the sectors performed. The sectoral indices like BSE IT or CNX Healthcare can be of use here. They can even help you select stocks for your Portfolio.
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Across markets
Foreign investors are big players in our Stock Market. FIIs usually invest in the market that is expected to give the best returns world over. This can affect the returns in the Indian Stock Market. This is why it is important to compare the performances of Stock Markets in other countries too. Then take the best performing market and compare it with your Portfolio to get an idea about the returns possible.
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Regions
Countries are divided on the basis of their economic development. India, China, Brazil, Turkey and other developing countries are grouped together as Emerging markets. These regions are considered high-risk investments. Experts often compare returns from emerging markets with that of developed markets like US and Europe. The past two years, India has been one of the top investment destinations amongst emerging markets. As a result, a lot of FIIs invested in India, pushing markets higher.
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15.6%
Another way to compare market performance is through valuations – better called as fundamentals – over time. Better the valuation, greater the stability in the market. Without fundamentals, any rise in the market could be for a short term. One of the common measures is the Price to Earnings or PE ratio, which compares the stock’s price with the company’s profits. Most analysts use the expected earnings for this comparison. This is called Forward PE. Currently, the Sensex’s Forward PE is at a 10-year average of 15x. This reflects the market is unlikely to fall, and instead, could gain going forward.
