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In summary
Understanding Mutual Fund Returns
Holding Period Return measures the total return from an investment during the period you hold it. It can help you understand how an investment performed and compare investments held for the same period.
The key points to remember are:
- HPR is usually expressed as a percentage.
- It considers the initial value, ending value and income received during the holding period.
- A positive HPR means the investment gained value overall.
- A negative HPR means the investment lost value overall.
- HPR does not show the average return earned each year.
- Annualised return can be more useful when comparing investments held for different periods.
Understanding HPR can help you review past investment performance. However, it should not be used on its own to decide whether to buy, hold or sell an investment.
What is holding period return?
Holding Period Return is the total return earned from an investment over the period you hold it. It includes the change in the investment's value and income received during that period.
The period for which you own the investment is called the holding period. For example, if you buy an investment on 1 January and sell it on 31 December, your holding period is one year.
You can use HPR to review the performance of different investments. It is particularly useful when the investments have been held for the same period.
HPR is also called Holding Period Yield (HPY) in some investment contexts.
What is the holding period return formula?
The basic HPR formula is:
Holding Period Return = (Income + End of Period Value - Initial Value) / Initial Value × 100
The formula uses three main values. Understanding each one makes the calculation easier.
| Specification | Details |
|---|---|
| Initial value | The value of the investment when you start the holding period |
| End of period value | The value of the investment at the end of the holding period |
| Income | Income received during the holding period, such as dividends or interest |
The result is expressed as a percentage. A positive percentage shows a gain, while a negative percentage shows a loss.
How do you calculate holding period return?
You can calculate HPR using the formula by following a few simple steps.
- Find the initial value: Note the amount or value of the investment at the beginning.
- Find the end value: Note the value of the investment at the end of the holding period.
- Add income received: Include dividends, interest or other income that the calculation is intended to cover.
- Apply the formula: Add the income and end value, subtract the initial value, and divide the result by the initial value.
- Convert it to a percentage: Multiply the result by 100.
Example of holding period return calculation
Suppose you invest Rs. 10,000 in the shares of Company X. You hold the shares for three years and receive Rs. 100 as dividends each year. Your total dividend income during the three years is Rs. 300. At the end of three years, you sell the shares for Rs. 12,000.
Using the HPR formula:
HPR = (Rs. 300 + Rs. 12,000 - Rs. 10,000) / Rs. 10,000 × 100
HPR = Rs. 2,300 / Rs. 10,000 × 100
HPR = 23%
This means the investment generated a total return of 23% over the three-year holding period.
How can you compare two investments using HPR?
HPR can help you compare investments when they have been held for the same period. The percentage allows you to compare performance without focusing only on the amount initially invested.
For example, suppose two mutual fund schemes are held for three years.
| Investment | Initial value | End value | Income | HPR |
|---|---|---|---|---|
| Fund ABC | Rs. 1,000 | Rs. 1,500 | Rs. 100 | 60% |
| Fund XYZ | Rs. 2,000 | Rs. 2,300 | Rs. 150 | 22.5% |
For Fund ABC, the HPR is:
(Rs. 100 + Rs. 1,500 - Rs. 1,000) / Rs. 1,000 × 100 = 60%
For Fund XYZ, the HPR is:
(Rs. 150 + Rs. 2,300 - Rs. 2,000) / Rs. 2,000 × 100 = 22.5%
Based on HPR, Fund ABC generated the higher total return over the three-year period. However, HPR alone does not tell you which investment is better for your financial goals or whether the investments carried the same level of risk.
Why is holding period return useful?
HPR gives you a simple way to review the performance of an investment over a specific period. It combines the change in value with applicable income received during that period.
It can be useful for:
- Reviewing investment performance: You can see whether an investment gained or lost value during the period you held it.
- Comparing investments: You can compare HPRs when investments have been held for the same period.
- Including investment income: HPR can account for income such as dividends or interest along with changes in value.
- Tracking past performance: You can use HPR to review how an investment performed over a particular period.
HPR is a measure of past performance. It does not guarantee or predict future returns.
What factors can affect holding period return?
The HPR of an investment can change because of several factors. The main factors are changes in the investment's value and income received during the holding period.
For example, market movements can affect the value of shares and mutual fund investments. Interest rate movements can affect some interest-sensitive investments. Company performance and sector conditions can also affect the value of related investments.
The holding period itself is also important. A return earned over three years cannot be interpreted in the same way as the same percentage earned over one year.
What are the limitations of holding period return?
HPR is useful for measuring total return over a specific period, but it does not provide a complete picture of an investment.
The main limitations are:
- It depends on the holding period: A 20% HPR over one year and a 20% HPR over five years represent very different investment experiences.
- It does not adjust for inflation: A positive HPR does not necessarily mean that your purchasing power increased by the same percentage.
- Costs may affect your actual return: Brokerage charges, taxes and other applicable costs can reduce the amount you finally receive if they are not included in the calculation.
- It does not show yearly performance: HPR gives the total return for the selected period. It does not tell you the return earned in each year.
- It does not predict future returns: A past HPR cannot guarantee how the investment will perform in the future.
For example, an investment may show a 30% HPR over three years. This does not mean that it earned 30% every year.
How is HPR different from annualised return?
HPR shows the total return over the entire holding period. Annualised return expresses investment performance on a yearly basis, which can make comparisons easier when holding periods are different.
For example, suppose one investment has a 30% HPR over two years and another has a 30% HPR over five years. The same HPR does not mean that both investments performed at the same annual rate.
Annualised return accounts for the length of the investment period and, where applicable, the effect of compounding. This makes it more suitable for comparing investments held for different periods.
Is HPR the same as total return?
HPR is commonly used to describe the total return earned from an investment over a specific holding period. It can include both changes in the investment's value and income received during that period.
The exact treatment of income can depend on the return calculation being used. For example, whether income is received or reinvested can affect how a return is measured.
Therefore, when comparing return figures, check what the calculation includes and whether the figures are based on the same method.
Can HPR be negative?
Yes. HPR can be negative if the overall value of the investment and applicable income are lower than the initial investment value.
For example, if you invest Rs. 10,000 and the investment is worth Rs. 9,000 at the end of the holding period, with no income received, the HPR is:
HPR = (Rs. 0 + Rs. 9,000 - Rs. 10,000) / Rs. 10,000 × 100
HPR = -10%
A negative HPR means the investment recorded a loss over that holding period.
Can you use HPR for mutual funds?
Yes. You can use HPR to measure the return from a mutual fund investment over a specific period. The calculation needs to account for the relevant starting value, ending value and income included in the calculation.
If you are investing in mutual funds, you can explore different mutual funds and use relevant tools to understand potential investment outcomes.
For mutual fund investments made through the Bajaj Broking website, remember that mutual fund returns are subject to market conditions and are not guaranteed.
Can you use a calculator to estimate investment returns?
Yes. Online calculators can help you estimate returns by using information such as the investment amount, expected value and investment period.
For mutual fund investments, a mutual fund calculator can help you estimate potential returns based on the values you enter. The result is an estimate and does not guarantee future returns.
You can also refer to mutual fund units to understand how units are allocated and valued in a mutual fund investment.
What should you remember when using HPR?
HPR is most useful when you understand what the percentage represents. It measures the total return over a particular holding period, rather than an average annual return.
Before comparing two HPR figures, check that the holding periods and calculation methods are comparable. You should also consider risk, costs, inflation and your investment goals instead of relying on HPR alone.
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Frequently Asked Questions
Overview
Can Holding Period Return be negative?
Yes. HPR can be negative when the investment's value and applicable income are lower than the initial value. A negative HPR indicates that the investment recorded an overall loss during the selected holding period.
How does Holding Period Return differ from Annualised return?
Holding Period Return (HPR) measures total return over a holding period, while Annualised Return converts HPR into an average annual return that accounts for compounding effects, allowing comparison of performance across investments held for different durations.
Can Holding Period Return be used for any type of investment?
HPR can be used for different types of investments when the relevant starting value, ending value and income are available. It can be used to review investments such as stocks, bonds and mutual funds.
How does reinvestment of income affect Holding Period Return?
Reinvesting income can increase the Holding Period Return because the income earned is used to buy more units or assets. These additional investments can generate further returns over time. As a result, the overall return reflects both the original investment's growth and the gains from reinvested income, giving a more accurate picture of the investment's performance.
Is Holding Period Return the same as Total Return?
HPR is commonly used to describe the total return earned from an investment over a specific holding period. The exact calculation should be checked to understand whether income is received, reinvested or otherwise treated.
What are the two components of the holding period return?
Holding period return has two main components: income earned and change in the investment’s value. Income may come from dividends or interest received during the holding period. The change in value is the difference between the investment’s selling price and its purchase price. Together, these show the total return earned during the period.
What is the difference between holding period return and return?
Holding period return measures the total gain or loss on an investment over the exact period you hold it. Return is a broader term that can refer to the gain or loss from an investment over any period. In simple terms, holding period return is time-specific, while return can be used more generally to describe investment performance.
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Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.