Is this a good strategy to calculate Mutual Fund returns?

Question

I am trying to track my mutual funds performance in a meaningful way. I tried using XIRR but my understanding of it is not entirely clear.

So what I am alternately doing is for every individual investment I make, I calculate the profit or loss from it and then divide it by the number of days I have held that fund. This tells me in a concise way whether the fund has been earning me money or whether I am paying money to hold on to it.

It looks something like below - Note: For the sake of easier calculations, I have kept the per day returns value rounded. The rest of the values are arbitrary but accurate to the calculations.

So, my questions are -

1. Is this a good strategy to track my investment performance or am I missing something?
2. Is there anything else I can include in this to make it more meaningful? (Some other parameter to track)

Answer 1

Track your returns against the market over the same timeframe.

Determine how the market overall performed during the period and compare that to the mutual funds. When funds "beat the market" this is what they are comparing against.

Your way doesn't provide any useful information. In fact, there is a very good chance your metric is actively harming your portfolio.

Your way favors

1. New investments that have not weathered a market downturn.

2. Investments that were made before significant inflation.

And undervalues

1. Long term investments.

2. Investments that made it through bear markets.

I believe your way will hurt your portfolio because it'll encourage you to switch out of long term investments and continually reinvest on a short-term basis. Your brokers will love you because you're paying them every step of the way. They're making money, not you.

Always compare against the market. I'd also compare on a per quarter basis. If you look per day, you're likely to lose any useful info to daily fluctuations.