Absolute return objective

Before a portfolio manager buys a single share, the client has to say what "good" looks like. There are two ways to say it.

One way is a number that stands alone. "Grow my money by 15% a year." That is an absolute return objective. It does not care what the Nifty did. It only cares whether the portfolio hit the number.

The other way ties the number to a market. "Beat the Nifty 50 by 5% a year." That is a relative return objective, and it moves with the market.

An absolute goal is easy to explain to a client. It is also harder to hit in a bad year, because the market gives the manager no cover for missing it.

The workbook frames this inside the wider risk-return-liquidity discussion in section 9.3.4. Risk and return typically move together: higher risk, higher expected return. Liquidity works the other way when expressed as a discount rate — the easier an asset is to sell without a price cut, the lower its liquidity discount, so return demanded for illiquidity falls as liquidity rises.

Against that backdrop, the workbook gives the two ways an investor can state a return objective:

• Absolute: "to generate 15% p.a. on her investment for the next 'n' number of years."
• Relative: "to generate 5% p.a. more than the return on NIFTY 50 each year on the investment for the next 'n' number of years."

The investment objective set this way feeds the investment constraints discussion and, ultimately, the asset allocation decision: if the objective is capital appreciation with an absolute target, the portfolio tilts toward equity and growth assets capable of delivering that number outright.

Illustrative figures, following the workbook's method. Mr Verma hands his portfolio manager Rs 50,00,000 with an absolute return objective of 12% p.a. for 5 years, regardless of what the Nifty does.

Target corpus = 50,00,000 × 1.12⁵ = 50,00,000 × 1.7623 ≈ Rs 88,11,708.

In year 3, the Nifty 50 falls 8% and Mr Verma's portfolio returns only 6%. Against a relative objective of "beat the Nifty by 5%", the manager has done well — he beat the index by 14 percentage points. Against Mr Verma's absolute objective of 12% a year, the manager has missed by 6 percentage points, and the shortfall has to be made up in the remaining two years for the Rs 88.1 lakh target to still be reached.

Same manager, same year, opposite verdict — because the objective was stated as a number, not as a comparison.

Chapter 9 (Portfolio Management Process), section 9.3.4 (Investment Objectives), states the absolute-versus-relative distinction directly and gives both of its own illustrative phrasings. Expect a question that gives an investor's stated goal and asks whether it is absolute or relative, or one that gives a market fall and asks which type of objective the manager still has to meet.

• An absolute objective ignores the market entirely. A relative objective can be "beaten" even in a falling market; an absolute one cannot.
• Risk and return move together; liquidity and return (as a discount) move apart. The workbook states both relationships in the same section as the objective split, and questions mix them in.
• "5% more than the Nifty 50" is relative, not absolute, even though it contains a fixed number — the number is added to a moving benchmark, not stood alone.
• A client who wants tax saved is not stating an investment objective at all — the workbook is explicit that tax saving alone is not treated as an investment objective.