Read on to understand more about the holding period and how it impacts your investment
Investors always consider returns and yield, before investing in any instrument. However, there is one more thing that has equal importance, when it comes to making a financial decision. It is called the holding period. Usually, investors strategize their investment plans, as per the holding period. An investor, who needs money in a year or two, would have to strategize differently, as compared to someone who can wait for a decade for his investment to give returns. Here, the holding period plays a big role.
What is the holding period?
A holding period is the time period for which the investor holds on to the asset or immovable property. It is also calculated as the time between the purchase and sale of a security. In other words, a holding period is the amount of time the investment is held by an investor or the period between the purchase and sale of an asset or a security.
Basics of holding period
- The holding period is used to calculate the capital gains or losses on the investment. Any investments that have a holding of less than one year will be short-term holds (depending upon the asset type).
- The holding period is calculated, starting on the day after the asset’s acquisition and continues till the day of its disposal or sale. The holding period determines tax implications. In the case of real estate, the holding period shall be calculated from the date on which the property was booked or its possession date.
- When it comes to gifted property, shares, or securities, the holding period also includes the time for which the person, who gave you the asset, held them. However, your basis might be the fair market value at the date of the gift. If so, your holding period of the gifted asset will begin on the day after you received the gift.
- When it comes to inherited assets or stocks, your holding period is automatically considered to be more than one year. This applies, regardless of the actual holding period.
Calculating holding period returns
Holding period return is the returns earning from holding an asset or portfolio of assets over a period of time. Holding period return is calculated on the basis of total returns from the asset (income and the total increase in the overall value) and is used for comparing returns between investments held for different periods of time.
Holding period return can be calculated using the following formula:
HPR = ((Income + (Value at the end of holding period value-Initial value)) / Initial Value) x 100
Suppose you bought a property worth Rs 20 lakhs which gave you an annual income of Rs 1 lakh. Now after one year, the value of the property is Rs 22 lakhs. Your holding period return will be calculated in the following way:
((Rs 1 lakh + (Rs 22 lakhs – Rs 20 lakhs)) / Rs 20 lakhs) x 100 = 15%
So, your holding period returns is 15%.
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