Return Calculation Methodology

Each smallcase’s return is calculated from its Index value. To understand how index values are calculated and used to derive smallcase returns, please refer to following sections

What is an index value?

An index value allows the user to measure the change in the value of a portfolio relative to its value on a historical date. For example, let's assume that portfolio A was created on 1st Jan 2020. The index value of A on that day was 100. Suppose the index value of the portfolio on 31st March 2021 was 127. We can calculate the absolute return of A between the above-mentioned dates as (127/100)-1 * 100 = 27%.

How are smallcase index values calculated?

Lets understand this with an example. Portfolio FAME was created on 1st Jan 2014. The portfolio consists mostly of high quality large and mid-cap stocks that are expected to record steady growth in the future. The creator of the portfolio will rebalance FAME once in 3 months.To calculate the index values, the portfolio creation date, constituents of the portfolio and their respective weights are required. On the date of creation of the smallcase, the index value is set to 100. This can also be understood as a hypothetical Rs.100 investment in FAME. The calculation on 1st Jan 2014 was as below:

DateWeightStock closing priceNo. of sharesIndex Value
ABCDABCDABCD
1-Jan-1430.0%20.0%15.0%35.0%310.13493.1136.0149.80.100.040.110.23100.0
2-Jan-1430.0%20.0%15.0%35.0%305.3485.5133.7149.40.100.040.110.2398.9
3-Jan-1430.0%20.0%15.0%35.0%310.8496.0134.0153.80.100.040.110.23100.9
4-Jan-1430.0%20.0%15.0%35.0%306.2.5487.4132.9152.70.100.040.110.2399.7
5-Jan-1430.0%20.0%15.0%35.0%312.5500.8134.1152.90.100.040.110.23101.1
On 1st Jan 2014, the portfolio contained 4 stocks A, B, C and D. The weights of these stocks were 30%, 20%, 15% and 35% respectively. The closing prices of the stocks on that day is used to calculate the hypothetical number of shares that can be bought, assuming Rs.100 is invested in the portfolio. 100 * the weight of the stock will give the amount of money that can be invested in a specific stock. This number is divided by the closing price of the stock to derive the number of shares of that stock. Finally, by multiplying the number of shares of each stock with the stock’s closing price and adding the output for all the stocks, the index value is derived. Of course on the first day, the index value is the same as the amount invested, i.e 100.The number of shares of each stock will remain the same till the next rebalance date. Each trading day, the closing stock prices are multiplied by the number of shares. The sum of these data points will be the index value for that specific date.

How does rebalance affect the index value?

Rebalancing is the process of reviewing the stocks and their respective weights to ensure that it remains true to the theme or strategy of the smallcase. Rebalancing takes into account quarterly earnings, company news & updates, etc and uses proprietary algorithms to objectively narrow down on the right set of stocks and their corresponding weights.Continuing with the same example, let's assume The FAME portfolio gets rebalanced on 31st March 2014. The index values leading upto the rebalance date were as below:

DateWeightStock closing priceNo. of sharesIndex Value
ABCDABCDABCD
27-Mar-1430.0%20.0%15.0%35.0%280.2320.3120.1125.50.100.040.110.2382.7
28-Mar-1430.0%20.0%15.0%35.0%285.7341.1123.2125.80.100.040.110.2384.5
29-Mar-1430.0%20.0%15.0%35.0%284.9333.8119.9122.90.100.040.110.2383.1
30-Mar-1430.0%20.0%15.0%35.0%274.5344.7123.1123.70.100.040.110.2383.0
31-Mar-1430.0%20.0%15.0%35.0%273.9345.8121.7122.50.100.040.110.2382.6
In the rebalance, the weights of both A and D were reduced and a new stock E was added to the portfolio. Post rebalance, the stocks and their corresponding weights were as below:
StocksWeights
A20%
B20%
C15%
D30%
E15%
On 31st March Rs. 82.6 is the value of Rs 100 that was invested initially in the portfolio. It means that this is the investment that should flow into the new portfolio. 82.6 * the weight of the stock will give the amount of money that can be invested in a specific stock. Once again, this number is divided by the closing price of the stock, on the rebalance date, to derive the number of shares of that stock. By multiplying the number of shares of each stock, with the stock’s closing price and adding the output for all the stocks, the final index value is derived. On the day of rebalancing the index value will remain 82.6.
DateWeightStock closing priceNo. of sharesIndex Value
ABCDEABCDEABCDE
31-Mar-1430.0%20.0%15.0%35.0%15.0%273.9345.8121.7122.5239.90.060.050.100.200.0582.6
1-Apr-1430.0%20.0%15.0%35.0%15.0%268.4350.5117.7117.3244.50.060.050.100.200.0581.2
2-Apr-1430.0%20.0%15.0%35.0%15.0%275.1360.8119.5120.4244.20.060.050.100.200.0582.9
3-Apr-1430.0%20.0%15.0%35.0%15.0%273.3375.0123.5124.7242.20.060.050.100.200.0584.7
Again, the number of shares of each stock will remain the same till the next rebalance date. As earlier, each trading day the closing stock prices are multiplied by the number of shares. The sum of these data points will be the index value for that specific date.

Calculating returns using index values

As clarified earlier, index values are used to calculate smallcase returns. Index values of the smallcase and the corresponding category performance are available on the platform.The "Download chart" button on the smallcase page below the performance chart can be used to download the index values of the smallcase and related market category.To calculate the 1-month return of a smallcase, first decide on the base date and historical date. Suppose the base date is 1st Jan 2015, the historical date is 1st Dec 2014. Let's suppose the index values on these dates are 470.2 and 482.6 respectively. Then the 1 month return is (470.2/482.6)-1 = 2.58%. The absolute returns between any 2 dates can be calculated similarly.The index values downloaded from the platform are available only for trading days. So if 1st Dec 2014 was not a trading day the index value will be unavailable. In that case, the previous available index value can be used to calculate returns.

Does smallcase performance include the impact of transaction fees?

No, transaction fees and other related costs are not included to calculate the index value and performance of the smallcases. No actual money was invested or trades were executed while calculating smallcase performances. Returns are based on end of day prices of stocks in a smallcase.

Does smallcase performance include historical rebalances?

Yes, smallcase performance accounts for all the rebalances. smallcases are reviewed and rebalanced as per a schedule depending on the smallcase. As a result of this review process, some stocks may be added, some may be removed and some may undergo weight changes. smallcase returns reflect all these changes.

How are historical returns calculated?

Historical/backtested returns shown on the platform are calculated on the basis of data and information provided by the creator of the smallcase. These returns are calculated in a manner that there is no hindsight bias present in the results. It is the responsibility of the smallcase creator as a SEBI licensed professional to provide the correct and authenticate data for calculation of backtested results. To ensure this, every smallcase creator submits a declaration regarding the same before any backtested data is shown for his smallcase on the platform.