Summary of this article
Investors often track their mutual funds closely but pay far less attention to their stock portfolios. Looking at profits alone can be misleading; annualised returns and comparisons with the benchmark tell a fuller story.
A stock may be doing poorly for reasons that go beyond market sentiment. Checking a company’s earnings, debt, valuations and business prospects can help investors decide whether it is worth holding on to.
Many investors hold on to loss-making stocks, hoping to recover their
purchase price. But the more important question is whether the stock still deserves a place in the portfolio.
There is a curious contradiction in the way many investors manage money. If a mutual fund underperforms its category for two or three years, questions begin quickly: Should I exit? Has the fund manager lost his touch? How is the fund performing against its benchmark and peers?
Yet the same investor may hold a direct stock for five years with little progress and simply say, ‘It will come back’.
That difference in behaviour deserves attention.
Mutual Funds Are Easy To Judge
“Mutual funds come with a ready-made measurement ecosystem. NAVs are published every day, benchmarks are clearly defined, peer-category returns are widely available, and an investor can usually see one-year, two-year, three-year and five-year performance within minutes. Risk measures such as standard deviation, Sharpe ratio, tracking error and information ratio are also easily accessible,” says Ajay Kumar Yadav, CFP, Group CEO & CIO, Wise Finserv.
Because the information is structured, underperformance becomes visible quickly.
Direct equity is very different.
Most investors know what their stocks are worth. They do not always know what their portfolio has earned.
“Open almost any stock portfolio, and you will immediately see current market value, purchase value and absolute profit or loss. That is useful, but it is not the same as measuring performance,” says Yadav.
Suppose someone invested Rs 50 lakh over different dates during the last four years and the portfolio is worth Rs 65 lakh today. The natural reaction is that Rs 15 lakh has been made. But what return has the portfolio actually generated? Was it 6 per cent, 10 per cent or 15 per cent annualised? How did it perform over the last one year, two years and three years? More importantly, how did those returns compare with the relevant benchmark over exactly the same periods?
For mutual funds, these numbers can usually be seen almost instantly. For a direct-equity portfolio, someone first has to reconstruct the portfolio. Every purchase, sale, dividend and additional investment may need to be pulled out and organised. The transactions then have to be put into a spreadsheet, and XIRR or CAGR has to be calculated depending on the nature of the cash flows.
“If one wants to calculate one-year, two-year or three-year performance properly, the exercise becomes even more detailed. The portfolio value at the relevant starting and ending dates needs to be captured, all cash flows during the period need to be adjusted and only then can the return be calculated meaningfully and compared with the relevant benchmark,” says Yadav.
That effort is exactly why most individual investors rarely do it.
They keep looking at absolute profit instead of annualised portfolio performance.
And the two can tell very different stories.
Absolute Returns Can Create An Illusion
A portfolio may show a 35 per cent absolute profit and still have delivered an unimpressive annualised return if that gain took six years to generate. The picture becomes even clearer once the benchmark is added. If the portfolio compounded at 8 per cent while the relevant benchmark delivered 13 per cent, the investor has still made money, but there has been meaningful relative underperformance.
That gap often remains invisible until somebody actually does the mathematics.
“This is where a professional portfolio review can become an eye-opener. For the first time, an investor may realise that the portfolio is profitable but has still underperformed, or that most of the wealth creation came from only a handful of stocks while the rest merely occupied capital. In some cases, the investor may also discover that substantial stock-specific risk was taken without being compensated by superior returns,” says Yadav.
That is a very different conversation from simply looking at green and red numbers in a demat statement.
A Stock Does Not Come With A Warning, Saying It Has Stopped Working
Investors may own 20, 50 or even 100 stocks. Some were bought after research, some came through IPOs, some were suggested by friends and some were inherited. A few remain in the portfolio simply because selling below the purchase price feels uncomfortable.
This is where the monitoring gap becomes even wider.
Performance measurement is only the first layer. A stock should not be judged merely by whether its price has risen. It represents ownership in a business, which means the investor should continuously evaluate whether that business is becoming stronger or weaker.
Price Is Not Enough
Suppose a company falls 25 per cent. Has the investment thesis failed? Not necessarily. Earnings may still be growing strongly while the market temporarily de-rates the stock.
“Now consider another company whose share price has remained almost unchanged for three years. Is it simply waiting for its turn? Perhaps. But if profits are stagnant, margins are weakening, debt is rising and return on capital is deteriorating, the issue may not be sentiment. The business itself may be losing quality,” says Yadav.
That distinction is critical.
Every Stock Portfolio Needs A Health Report
A serious review of a direct-equity portfolio should go far beyond purchase price and current market value.
The first layer should be portfolio performance. An investor should know the portfolio's XIRR, its one-year, two-year and three-year returns, how those numbers compare with the relevant benchmark, how much risk was taken to generate them and which holdings actually contributed to performance.
The second layer should focus on business quality. Is revenue growing? Are earnings keeping pace? Are operating margins improving? What is happening to ROE and ROCE? Is debt increasing? Is free cash flow supporting reported profits? Are earnings estimates being upgraded or downgraded? Is the valuation still justified by future earnings growth?
Then comes portfolio construction. How concentrated is the portfolio? How much sits in one sector? What percentage of total returns comes from the top five holdings? Which stocks are actually creating wealth and which are simply occupying capital?
That last question is particularly important.
Do Not Confuse The Number Of Stocks With Diversification
A 25-stock portfolio can still be highly concentrated. An investor may own a bank, an NBFC, a housing finance company and an insurance company and feel diversified because they are four different stocks. In reality, all four may be exposed to overlapping economic and financial-market drivers.
“The same can happen across technology, consumption, infrastructure and other themes. A portfolio therefore needs to be examined at the risk-factor level, not merely by counting securities,” suggests Yadav.
The Purchase Price Is Irrelevant To The Company's Future
This is perhaps the hardest behavioural hurdle.
An investor buys a stock at Rs 1,000 and it falls to Rs 700. The investor refuses to sell because the plan is to exit once it comes back to Rs 1,000.
But the company has no idea where you bought its shares.
Future returns will depend on future earnings, valuation and business performance, not on your purchase price. The better question is not whether the stock will recover your loss, but whether you would buy the same company today if you had fresh money.
If the answer is no, the original purchase price should not become the reason to keep holding it.
Opportunity Loss Matters Too
Traditional portfolio statements show realised and unrealised profit or loss. They rarely show opportunity loss.
Suppose Rs 25 lakh remains invested in a business that delivers almost no return for five years while an appropriate benchmark compounds meaningfully. The investor may say, ‘At least I have not lost money’.
Economically, that may not be true.
Capital has a time value. A proper portfolio review should therefore examine not only how much money was lost, but also what the capital could reasonably have earned elsewhere for comparable risk.
Stocks Deserve More Monitoring, Not Less
Owning individual businesses can be rewarding, but it comes with responsibility. When investors outsource money to a mutual fund, a professional investment team continuously tracks businesses, quarterly results, management commentary, industry developments, valuations and risk.
A direct-equity investor has effectively chosen to perform at least part of that job personally.
Yet many investors can tell you exactly how their mutual fund has performed over one, three and five years while they cannot tell you the annualised return of their own stock portfolio. They know the absolute profit, they know their biggest winner and they often remember the purchase price of a stock bought years ago. What they may not know is whether the portfolio itself has actually beaten the benchmark.
That is the real monitoring gap.
“When an adviser reconstructs the cash flows, calculates the actual XIRR, builds one-year, two-year and three-year performance numbers and places them alongside the relevant benchmark, the result can sometimes be uncomfortable. But it can also be extremely valuable,” observes Yadav.
Because the question then changes from ‘How much money have I made? ’ to ‘Was the return good enough for the time and risk I took? ’
And after that comes an even more important question:
Which businesses in my portfolio are becoming better businesses, and which ones are quietly becoming worse?
That is where serious stock portfolio monitoring begins.
