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What is the Holding Period Return/Yield?
By Bajaj Broking Team
June 13, 2024
4 mins read
News
When you start investing, one of the first questions you'll ask is, "How well is my investment actually doing?" It looks easy, but it can be hard to figure out the real return. This is where a key measure comes in.
The Holding Period Return, also known as the Holding Period Yield, is a simple way to figure out how much money you made or lost on an asset or portfolio over the time you owned it. It's a basic calculation for all investors.
It shows you everything about how your investment is doing, not just how much the price has changed. It takes into account all of your income, which is why the Holding Period Yield is such an important tool for keeping track of your financial progress.
Understanding Holding Period Return
So, what is the Holding Period Return? You can think of it as the total scorecard for an investment you've had for six months, a year, or even a decade. It measures performance directly.
It’s a holistic metric. The calculation doesn't only look at how much the asset's price has changed. It also includes any money you made during that time, such as dividends from stocks or interest from bonds. This gives you a complete and correct picture of your real return.
Holding Period Return Formula
The Holding Period Return is appealing due to the fact that it is fairly straightforward. The method is meant to be easy to understand and shows how much money you've made compared to how much you have spent to make it. It provides a straightforward percentage return that is easy to understand and evaluate.
This is the usual formula for the Holding Period Return:
HPR = [Income + (Ending Value of Investment – Initial Value of Investment)] Initial Value of Investment
In this case, "income" is whatever interest or dividends you get. There is a difference between the "Ending Value" and the "Initial Value," and this difference represents your capital gain or loss. It is possible to calculate your overall gain as a percentage by using the Holding Period Return Formula, which involves adding these two sources of return together and then dividing the total by your initial cost.
Importance of Holding Period Return/Yield
The Holding Period Yield may look like just another piece of financial jargon at first, but it is quite valuable for a few important reasons. It makes your financial path much clearer.
First, it's a direct way to measure performance. The Holding Period Return tells you exactly how an investment has performed under your ownership, which helps you see if your investment strategy is working as intended or if it needs a rethink.
It also allows for straightforward comparative analysis. You can use the Holding Period Yield to compare two completely different assets—like a stock and a mutual fund—to see which one performed better over the same timeframe.
Lastly, this number is very important for making decisions. Calculating the HPR gives you a clear, data-backed picture of whether you should keep an asset, sell it, or maybe even buy more of it.
Holding Period Return Example
Let's look at a real-life example to understand how the holding period return works. Think about how you acquired 50 shares of a firm a year ago for ₹200 each. Your entire initial investment would be ₹10,000.
The corporation paid a dividend of ₹5 per share throughout the course of the year. Your total dividend income is ₹250 if you own 50 shares. You look at the stock price at the end of the year and see that it has gone up to ₹220 per share.
You now have ₹11,000 worth of your 50 shares, which is a ₹1,000 capital gain. To get the Holding Period Return, you add your income (₹250) to your capital gain (₹1,000). This gives you ₹1,250. You then divide this by the ₹10,000 you put in at first, which gives you a Holding Period Return of 12.5%.
How to Calculate Holding Period Return/Yield
Only a few pieces of information are required to calculate the Holding Period Yield, which can be done with relative ease. You are required to add up all of your winnings and then evaluate them in relation to the initial sum that you began with. First, let's disassemble it.
The Holding Period Return Formula begins by adding up all of the income that was received (for example, dividends) and the capital gain (the difference between the selling price and the buying price), and then divides that total by the initial purchase price.
Let's take a look at another scenario. Let us assume that you purchased a stake for a sum of ₹150. You were entitled to a dividend of ₹10 during the year that you owned it. The price of the stock at the end of the year was ₹170.
Step-by-step calculation
Step 1: Find out how much money you made by subtracting ₹150 (the initial price) from ₹170 (the end price).
Step 2: Write down your income: ₹10 from dividends
Step 3: Add up the total return: ₹20 (capital gain) + ₹10 (income) = ₹30.
Step 4: Use the formula: (₹30 / ₹150) = 0.20
Step 5: Change it to a percentage: 20% = 0.20 x 100
This investment will return twenty percent of what you initially put in over the course of the time that you own it. This straightforward, step-by-step guide eliminates the need for guesswork and provides you with a simple method to evaluate your level of success.
Annualizing the Holding Period Yield
It can be hard to compare assets that have different holding periods at times. You can use a formula to turn the HPRs into yearly numbers to make this situation easier to handle.
To turn the Holding Period Return (HPR) into a yearly number, add 1 to the HPR amount. Next, get the nth root of this total, where "n" is the number of years in the holding period. Finally, subtract 1 from the answer to get the return for the year.
Let's use an example to show this. For two years, let's say we have an HPR of 25%. To get 1.25, we first add 1 and 0.25. Next, we find the square root of 1.25, which is about 1.18.
Now, we take 1 away from 1.18, which gives us 0.18. If we multiply by 100, we get an annualised return of 11.8 percent. This strategy makes it easier for investors to compare results over different time periods.
Practical Applications
The Holding Period Yield is not just a simple math problem. There are a lot of useful ways it can help you become a better investor.
Comparing Investments: It lets you see how well different kinds of investments, like stocks, bonds, or real estate, did while you owned them in a way that makes sense.
Strategy Evaluation: You can objectively see how well your investment plan is working by regularly calculating the HPR for your assets. You can change things based on what really happened instead of how you feel this way.
Planning your money: The Holding Period Return can help you figure out your long-term financial goals, such as how much you need to save for a big purchase or how much you need to save for retirement.
Risk-return analysis: By looking at an asset's Holding Period Yield and the amount of risk you took on, you can better understand the risk-return trade-off and make better investment decisions in the future.
Limitations of Holding Period Return/Yield
The Holding Period Return is a good number, but it's not a great one. You need to know what it can't do in order to use it correctly and not draw wrong conclusions from the data.
Time variation is a major issue. The outcome depends solely on how long you hold it. Comparing assets held for different periods may be difficult without annualising the return.
The HPR also doesn't look at how much things change. It only considers the beginning and the end points, not any major price changes. The HPR wouldn't indicate a risky investment.
The basic Holding Period Return Formula ignores money's value over time. It treats a rupee earned today as if earned a year from now, which is financially incorrect.
Conclusion
The Holding Period Return is a direct and important way to find out how well all of your investments are doing. It shows you the whole picture by showing both the asset's value going up and the money it made while you owned it.
It has some problems, but its ease of use and clarity make it a must-have tool. The Holding Period Yield is a useful tool for all investors because it lets you compare different assets, keep track of your strategic progress, and make better financial choices.
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