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Understanding Holding Period Yield in Your Portfolio

23 Aug 2023

Introduction:

Various investment avenues provide different forms of financial returns. For instance, you earn through capital appreciation when you invest in stocks. Established companies can even provide dividends to their shareholders. Similarly, when you invest in fixed deposits, bonds, and other debt instruments, you earn interest on your investment value.

Generally, the longer you invest, the larger your Holding Period Yield (HPY) or Holding Period Return (HPR) is. In the world of investing, the acronyms HPY and HPR are often used to analyze the performances of investment portfolios.

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But do you know what this HPY or HPR is and how you can calculate it in your portfolio? Continue reading to find answers to all such questions.

What is a holding period?

Before you can learn about the HPR, you must understand the holding period. The duration you hold on to your investment is known as the holding period. Notably, it is the time gap between the purchase date and the sale date of a share or group of shares.

For a long-term investor, the holding period refers to the duration between the initial purchase and the subsequent sale of a security. Whereas, for intraday traders with short positions, the holding period is the time gap between the date the short seller repurchases or buys back the shares and the date on which the shares are delivered to the buyer.

What is a holding period return?

Now that you know what a holding period is, it’s time to discuss the holding period return. It is the total return you receive from the assets in your portfolio during the holding period. You can calculate the holding period return as a percentage of your initial investment value. HPR is particularly useful for comparing returns from different investment instruments for varying holding periods.

Sometimes, you may hear the term ‘Holding Period Yield’ or HPY instead of Holding Period Return. Both these terms have similar meanings and serve the same purpose. That is why HPY and HPR are often used interchangeably.

How to calculate the holding period return?

You can calculate the holding period return online by using an HPR calculator. All you have to do is enter a few values, including your investment's initial and final value, purchase date, and selling date. Once you enter these values and click the “Calculate” button, the online calculator will determine your HPR and display it within a few seconds.

Alternatively, you can calculate your HPR manually using the mathematical formula mentioned below:

HPR/HPY = [{Dividend income + (Value of investment after the end of the holding period – Initial investment value)} / Initial investment value] x 100

For example, suppose you purchased 1,000 shares at Rs. 200 per share a year ago. Your total investment value was Rs. (1,000 x 200), i.e., Rs. 2 lakhs. At the current date, the market value of your shares is Rs. 300 per share. Thus, the value of your investment after the end of the holding period is Rs. (1,000 x 300), i.e., Rs. 3 lakhs.

You have also received a dividend of Rs. 5 per share during your holding period, resulting in an income of Rs. (1,000 x 5), i.e., Rs. 5000.

Now, the calculation of the HPR on your portfolio will be as follows:

HPR = [{5000 + (3,00,000 – 2,00,000)} / 2,00,000] x 100, i.e., 52.5%.

Importance of HPR for investors

You can use the HPR value to make informed investing decisions as an investor. It can help you compare two investment avenues and determine which performed better during the same holding period. Let’s take the help of another example to understand this.

Suppose there are two shares – Share A and Share B. The value of share A has appreciated from Rs. 100 to Rs. 150 over one year. The company has also provided a dividend of Rs. 5 per share during this period. Similarly, the value of share B went from Rs. 200 to Rs. 320 in the same period while earning a dividend of Rs. 10 per share for the investors.

HPR for share A = [{5 + (150-100)} / 100] x 100, i.e., 55%

HPR for share B = [{10 + (320-200)} / 200] x 100, i.e., 65%

As you can see, share B has outperformed share A during the same holding period. Based on this, investing in share B can fetch better returns.

To conclude

HPR/HPY is a crucial metric that helps you determine the relative income you’ve generated from your investments during a holding period. You can also use this metric to compare and choose between two or more investment options. However, the drawback is it is effective only if the holding periods for both investment options are the same. For more accurate results, you can consider annualized HPR.

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