While evaluating the performance of a portfolio you need 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:
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’.
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.
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.
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.
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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