Computing the Performance Numbers of WealthBaskets

Across the financial industry, the one thing that makes it hard for users to compare the different investment options is the way the returns are stated. So to ensure the best interest of investors, we have decided to change the way the WealthBasket returns are shown on the WealthDesk platform.

First, let us look at the most common types of returns you generally see for investment options: Compounded Annual Growth Rate (CAGR) and Absolute Return.

What is CAGR?

It is used in the investment world to measure an investment’s annual growth rate over a period of time, generally more than a year. CAGR takes into account the effect of compounding. 

Want to know how is CAGR calculated? The formula for calculating CAGR is:

(Ending Value/Beginning Value) ^ (1/No. of Periods) – 1

Example: if Ending Value is ₹1,500; Beginning Value is ₹1,000 and the number of periods is 3 years, then, using the above formula, the CAGR is 14.47%.

You may be wondering, why did we not simply do (₹1,500/₹1,000) – 1? By doing this, you get what is called Absolute Return.

What is Absolute Return?

The Absolute Return is the total return an investment has provided over a period of time. The formula for calculating Absolute returns is:

(Ending Value/Beginning Value) – 1

Example: if Ending Value is ₹1,500; Beginning Value is ₹1,000, then the Absolute Return is 50%.

So if you see, the difference between CAGR and Absolute Return is significant. Both give us different returns. CAGR gives the steady year on year growth rate while the Absolute Returns give us the cumulative returns earned.

Why are we changing the way we show the returns?

WealthDesk provides a platform for Registered Investment Advisors (RIAs) and Research Analysts (RAs) to offer curated portfolios of stocks and ETFs that we call WealthBaskets.We at WealthDesk are always working for the best interests of the investors. So, we are changing the way the returns of WealthBaskets are shown and are providing a standard way to compare all WealthBaskets on WealthDesk.

Now coming to the main question, What are the changes WealthDesk is implementing?

The Changes WealthDesk is implementing!

To make the User Experience better, we are implementing the following changes:

1. Using Absolute Return: The WealthBaskets will display Absolute Return for the first year of their performance data. The Absolute Return will be shown either on the basis of days, weeks or months, depending on the time  period the performance data is available for.
2. Using CAGR: Once we have the performance numbers for more than a year, the returns that will be shown will be based on CAGR calculations.

Returns for different situations

The returns displayed for the WealthBaskets will depend on the time period since the performance data is available (Live or Backtested). For anything less than a year, the daily, weekly or monthly absolute returns will be shown and after that the relevant CAGR will be shown.

Below, we will show you how the returns will be displayed based on different periods of time.

Assuming a WealthBasket has the performance data starting 3rd Jan 2022, this is how you might see the returns over different periods:

Note: This is not an exhaustive list. It just gives an idea of the returns you would see for selected time periods.

Additionally, in the performance graph, we are also adding tabs for the user to see the returns for the Absolute or the CAGR time period & the Live time period (time since the WealthBasket was launched on WealthDesk) as well.

Conclusion

We hope that these changes that we are making on the WealthDesk platform will make it easier to understand the returns for the users.

If you have any questions, please feel free to reach out through our social media channels or email us at support@wealthdesk.in

Thank You!