What is the Holding Period Return/Yield?

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Introduction

With free trading accounts attracting more and more investors and traders into the market, there is a lot of growth in the number of options to invest in. This is especially true after the demat account opening process became simplified in recent years. Hence, it becomes important to make comparisons carefully and utilise tools like Holding Period Return/Yield wisely. 

What is Holding Period Return/Yield?

Holding Period Return/Yield, or HPR/HPY, measures the total return from an investment for the holding period. This metric considers any income received and capital gains/losses realised through the investment. HPR is crucial for getting a comprehensive view of the investment’s performance. 

Importance of Holding Period Return/Yield

1. Performance Measurement: HPR assists in assessing the performance of investments and evaluating how effective these investment strategies are. 

2. Comparative Analysis: Investors can draw a comparison across their investments based on their HPR values which would help them identify better-performing investments. 

3. Decision Making: HPR assessments give investors clarity about whether to hold or sell an investment or even increase its units. 

4. Income and Capital Gains: HPR takes into both income and gains from investments. Income can be dividends or interest, while gains can be capital gains. This offers a holistic view of their returns. 

How to Calculate Holding Period Return/Yield

The Holding Period Return formula is as follows. The sum of the capital gain/loss made from the investment and the income received from it has to be divided by the initial price of the investment. This would be multiplied by 100 to arrive at the percentage value. 

The capital gain/loss made from the investment can be calculated by finding out the difference between the end price of the investment and the initial price. 

Step-by-Step Calculation

  1. Note down the initial price and the end price of the investment. 
  2. Calculate the difference and find out the capital gain/loss.
  3. Note down the income received through the investment. 
  4. Add the capital gain/loss and the income.
  5. Divide the sum by the initial price. 
  6. Multiply the result by 100. 

For example, consider this scenario. Imagine you purchased a stock for 100 INR per share, and held it for a year. During this holding period, you received a dividend of 5 INR per share. And the end price of the stock rose to 120 INR per share. 

Capital gain/loss equals 20 INR per share (120 minus 100) and the income received equals 5 INR per share. The sum equals 25 INR per share. Dividing this by 100 per share (initial price) we get 0.25 as the result. This when multiplied by 100 becomes 25 percent. The HPR is 25 percent in this example. 

Annualizing the Holding Period Yield

In certain cases, one might have to compare certain investments that have different holding periods and this can be challenging. To handle this situation better, one can annualize the HPRs using a formula. 

Add 1 to the HPR and then find the nth root of the result. After this, subtract 1 from the resultant value. 

For example, let’s annualise the HPR of 25 percent for a holding period of 2 years. 

1 plus 0.25 (1 plus HPR) would be 1.25 and 1.25 to the root of 2 would be 1.18. 

1.18 minus 1 equals 0.118 or 11.8 percent. 

Practical Applications

1. Investment Comparison: A variety of investments with varying holding periods can be compared using HPR. 

2. Performance Analysis: Studying the investments helps one assess how effective their investment strategies are and aids them in making adjustments as required.

3. Financial Planning: HPR analysis can be incorporated into financial planning. This will help in estimating future returns easily and will assist in making informed decisions about retirement savings and funding education etc.  

4. Risk Assessment: A comparison between HPR and the risk that comes with an investment helps in understanding the risk-return tradeoff better. 

Limitations of Holding Period Return/Yield

1. Timeframe Sensitivity: Although annualising yield is possible, comparing investments across varying holding periods makes the analysis cumbersome. This is because HPR is highly sensitive to the holding period’s length, as the name suggests. 

2. Ignoring Interim Fluctuations: HPR takes into account the difference between the initial and end prices, but fails to consider the interim fluctuations that the investment value might have experienced during the holding period. 

3. No Risk Adjustment: The risk involved in getting the returns on the investment is not accounted for in HPR calculation. The risk factor can be crucial and without it, the analysis is sort of incomplete. 

4. Reinvestment Assumptions: HPR as a concept assumes that the income received from an investment is reinvested, which isn’t necessarily the case all the time. 

Conclusion

Holding Period Return/Yield is a crucial metric when it comes to evaluating the performance of investments. HPR offers a comprehensive view of returns by taking into account both income received from the investments, and capital gains realised through the investment. Despite its limitations, the HPR plays a major role in decision-making, comparing investment options, and optimizing the performance of the asset collection.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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