15.9 Return considerations of portfolio

Portfolio returns

You must see how much return you expect and if it is adequate to your risk-bearing capacity. For evaluating return expected, do not look at absolute return, but consider the return in percentage. If, for example, you have Rs 20,000 to invest, you may choose from two options – either to buy TISCO at Rs 320 per share from the secondary market or to invest in any of the IPO floated in the market at Rs 10 each at par from the primary market. You expect the IPO to be quoted after two months, when each share will be quoted at an expected price of Rs 15. By that time, you expect the TISCO share to rise to Rs 370.

Looking at a per share value in absolute terms, TISCO definitely is giving you a better gain of Rs 50 (Rs370 – Rs 320) as compared to Rs 5 (Rs 15 – Rs 10) for the IPO unit. But here lies the fallacy. Actually, the IPO unit gives you a better return in overall percentage term as you get {(15 -10)/10} × 100 = 50 per cent from the IPO unit against {(370 -320)/320} × 100 = 15.63 per cent return from TISCO.

The focus here is on percentage return as your funds are limited and hence the per cent value is important. For instance, by investing Rs 20,000 on the TISCO shares, you buy 62 shares which after eight months will give you 370 × 62 = Rs 22,940. Instead, if you invest Rs 20,000 in the IPO units at Rs 10 each, you can buy 2,000 units, which after eight months can be sold at 15 × 2,000 = Rs 30,000. So the gain from the TISCO is Rs 22,940 – Rs 20,000 = Rs 2,940 from your investment while you could get Rs 30,000 – Rs 20,000 = Rs 10,000 if you had invested in the IPO units.

Please note that even a small price movement in a low priced share always gives you a higher percentage return and vice-versa. Measure returns in terms of assured income as well. An old widow, living on the income generated from her husband’s investments, would be interested in the assured return from investment. Hence, fixed income securities, blue chip shares which give high dividends regularly and debentures yielding high interest would be the best investment for her. But if you were an ambitious young man impatient to see your money growing, the focus would be on growth stocks and not on any good dividend paying company at high price shares.

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