Every investor sees “portfolio health” differently. Some chase growth; others focus on stability and allocation. Much of that depends on where you are in your investing journey. Early-stage investors often have a higher risk appetite and naturally gravitate toward growth opportunities. Those closer to their goals, on the other hand, may prioritize balance and capital preservation.
No matter where you stand, there’s one truth that holds across the board; you can’t improve what you don’t measure. Understanding how to objectively assess your portfolio’s performance helps you adapt, correct, and optimize your strategy before it drifts off course.
In this post, I’ll break down key parameters that give a holistic view of portfolio health, across three broad categories: Performance, Risk, and Plan.
A quick note – the tools mentioned here are for illustration, not endorsement. Most examples are equity-oriented since that’s where investors tend to be most active, but the many of the principles apply across other asset classes.
A. PERFORMANCE: Are You Measuring What Matters?
Anything that can’t be measured can’t be managed. You might feel your investments are “doing fine,” but feelings aren’t facts. The question to ask is – are your returns actually beating the median for your category?
A wrong measure is as bad as no measure. That’s where XIRR comes in. XIRR accounts for varying investment amounts over time, making it the most accurate way to gauge real portfolio performance.
You can use a free calculator like this one, or even create your own formula in Excel. If you’re using Zerodha, the Holdings page displays your XIRR directly.
Sometimes, your XIRR might surprise you, in a good or bad way. Even if your portfolio’s value has doubled, your returns might tell another story once time and capital flow are factored in. Consider the following illustration. The XIRR paints a true picture on how bad the investment was!
Beyond XIRR: Understanding Alpha
Next, ask yourself – are the extra returns you’re earning worth the extra risk?
That’s where Alpha steps in. It measures your investment’s performance relative to a risk-adjusted benchmark. You can explore more about Alpha here and analyze your mutual funds using tools like Sharpely’s Alpha Analysis.
Catching the Rolling Returns Cycle
For mutual funds, Rolling Returns is a fantastic measure of consistency. It shows how a fund performed across different periods, not just one cherry-picked time frame. If your XIRR consistently trails the rolling return for the same duration, it might mean your timing or allocation needs a rethink.
Try this Rolling Returns Calculator. For instance, the PPFAS fund’s 3-year rolling returns have often exceeded 10%, sometimes even 20% since 2013. That’s the kind of data-backed confidence you want to see for your current investments.
For a more complete analysis, tools like Sharpely WealthView can give you a consolidated health check of your investments.
The Pareto Edge
Remember the Pareto Principle i.e. 80% of your returns often come from 20% of your holdings. I’ve blogged about this earlier here. Understanding where your concentrated bets are driving performance helps you fine-tune your portfolio and lean into your winners strategically instead of being frustrated over the entire breadth of bets not performing.
B. RISK: What’s the Cost of Those Returns?
Performance means little without understanding the risk that drives it. A great place to start is by tracking your portfolio’s Beta, a statistical measure of volatility compared to the market. A Beta greater than 1 indicates higher-than-market volatility; less than 1 means relatively stable movement.
You can read more about Beta here.
Zerodha provides risk insights into your portfolio in their Console section which is worth checking at regular intervals.
For investments in mutual funds, you can use screeners to filter funds based on Beta scores. For example Sharpely’s mutual fund screener gives ability to check the score for a particular fund category, and then you can further apply filters on top of it.
Diversification is another key aspect of portfolio management. It’s your defense line against volatility.
Keep an eye on your sector and stock concentration through your brokerage tools. You can set personal diversification rules, such as:
- No more than X% in a single stock or sector
- Maintain a balance across large, mid, and small caps
- Regularly re-balance when capital appreciation skews the mix
C. PLAN: Are You Still Aligned With Your Goals?
A healthy portfolio doesn’t just grow; it stays in sync with your plan.
Ask yourself periodically:
- Have you rebalanced recently after big market, economy or policy moves? Has your recent capital appreciation on of the one investments skewed your overall portfolio allocation?
- Is your cash flow strong enough to meet ongoing needs? (You can explore more in my post on F.I.R.E). Not having the right cash flow may lead to force liquidation of investments in untimely manner which can terribly disrupt the financial goals.
- Is there idle cash that’s missing compounding opportunities? What’s the opportunity cost if that money stayed invested? What would have been the XIRR if they were to have been deployed in some investment X instead, even for short to mid term, while you make the investment decision?
- Are your emergency funds still ring-fenced and accessible when needed?
Remember, “invest and forget” is not a strategy; it’s a slow drift away from your goals. Monitoring a few key metrics regularly keeps you in charge of your financial trajectory. By measuring performance smartly, understanding your risks, and staying anchored to your plan, you’ll not only protect your wealth but also position it to grow meaningfully over time.
So, Measure, Learn, and Adapt!
