Understanding Holding Period Return (HPR) and Its Application with Case Based Examples with its Regulatory & Exam Preparation Aspects

Understanding Holding Period Return (HPR) and Its Application with Case Based Examples & its Regulatory Aspects from Exam Point of Views.

Investors constantly seek ways to evaluate their investment performance accurately. One of the most straightforward yet effective metrics for this is the Holding Period Return (HPR). This article will delve into what HPR is, its application in the Indian market, its significance, and how it benefits investors, particularly in mutual fund investments. We'll also discuss regulatory standards for reporting HPR in India and internationally.

What is Holding Period Return (HPR)?

Holding Period Return (HPR) is the total return earned on an investment over a specified period. It includes all forms of income, such as dividends or interest, and capital gains or losses, expressed as a percentage of the initial investment.

The formula for HPR is: $\mathrm{<br>}\mathrm{<br>}\mathrm{<br>}𝐻𝑃𝑅=\frac{(𝐸𝑛𝑑𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡+𝐼𝑛𝑐𝑜𝑚𝑒-𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)}{𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔𝑉𝑎𝑙𝑢𝑒𝑜𝑓𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡}\times 100$

Example Calculation

Imagine you invest ₹1,00,000 in a stock. After one year, the stock's value rises to ₹1,10,000, and you receive ₹5,000 in dividends. The HPR would be:

$𝐻𝑃𝑅=\frac{(\text{₹}1,10,000+\text{₹}5,000-\text{₹}1,00,000)}{\text{₹}1,00,000}\times 100=15\mathrm{\%}\mathrm{<br>}\mathrm{<br>}$

This 15% HPR shows the return on your investment over the holding period of one year.

Application of HPR 

Scenario 1: Equity Investments

Consider an investor who purchases shares of Reliance Industries at ₹2,000 per share. After two years, the price rises to ₹2,500, and they receive dividends totaling ₹100 per share. The HPR calculation would be:$𝐻𝑃𝑅=\frac{(\text{₹}2,500+\text{₹}100-\text{₹}2,000)}{\text{₹}2,000}\times 100=30\mathrm{\%}$

Scenario 2: Mutual Funds

Suppose an investor puts ₹1,00,000 in a mutual fund scheme. After three years, the value of their investment grows to ₹1,50,000, including dividends reinvested. The HPR would be:$𝐻𝑃𝑅=\frac{(\text{₹}1,50,000-\text{₹}1,00,000)}{\text{₹}1,00,000}\times 100=50\mathrm{\%}$

 An investor puts ₹1,00,000 in a fixed deposit at an interest rate of 6% per annum. After one year, the interest earned is ₹6,000.  

HPR=(100000+6000−100000)100000×100=6%

 An investor buys shares worth ₹75,000. Over a year, they receive ₹3,000 in dividends, and the shares’ value increases to ₹90,000. HPR=(90000+3000−75000)75000×100=24%

Significance of HPR

HPR is significant because:

1. Simplicity: It offers a straightforward way to measure investment performance.
2. Comparative Analysis: Investors can use HPR to compare the returns on different investments or asset classes over the same period, aiding in better allocation of resources.
3. Versatility: Applicable to various assets, including stocks, bonds, and mutual funds.
4. Decision Making: Helps investors compare different investments
5.  Performance Measurement: HPR is a comprehensive measure as it accounts for both capital gains and income received, giving a complete picture of an investment’s performance.
6.  Risk Assessment: By analyzing HPR over various periods, investors can assess the volatility and risk associated with an investment.

Benefits of Knowing HPR

1. Performance Evaluation: Investors can evaluate how well their investments have performed over a specific period.
2. Comparison: Compare returns across different investments or against benchmarks.
3. Informed Decisions: Make better-informed decisions regarding holding, selling, or buying more of an investment.

Regulatory Standards for Reporting HPR

India- In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI mandates that mutual funds disclose returns over various periods, such as 1-year, 3-year, and 5-year returns, using standardized calculation methods. This ensures transparency and helps investors understand the performance of their investments over different holding periods.

International- Globally, standards for reporting investment returns are overseen by bodies such as the Global Investment Performance Standards (GIPS), which provide guidelines for performance measurement and reporting. These standards ensure consistency and comparability of investment performance across different regions and investment firms.

Impact on Mutual Fund Investment Decisions

Understanding HPR can significantly impact an investor's decisions regarding mutual funds:

1. Evaluating Fund Performance: By comparing the HPR of different mutual funds, investors can identify which funds have performed better over the same period.
2. Assessing Risk: Higher HPR might indicate higher returns, but it could also signal higher risk. Investors can balance their portfolios based on their risk tolerance.
3. Choosing the Right Fund: Investors can choose funds that align with their financial goals and investment horizon.

ExampleSuppose an investor is considering two mutual funds:

• Fund A: 1-year HPR of 12%, 3-year HPR of 35%, and 5-year HPR of 60%.
• Fund B: 1-year HPR of 8%, 3-year HPR of 28%, and 5-year HPR of 55%.

Based on these HPRs, the investor might prefer Fund A for its higher returns, assuming the risk levels are acceptable.

Holding Period Return (HPR) is a vital metric for evaluating the performance of investments over specific periods. In the Indian context, it helps investors make informed decisions about their equity and mutual fund investments. With regulatory bodies like SEBI ensuring transparent reporting, investors can rely on standardized performance data to guide their investment choices. Understanding and utilizing HPR can lead to more effective portfolio management and better investment outcomes.

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