Recently, I noticed an issue when checking my fund account —
Why are the holding yield rate and cumulative yield rate different?
Which one should I refer to?
Many of my friends have the same doubts about “yield rate”, such as:
Why does the fund yield rate differ from the rate displayed on the account? How to calculate your real investment yield? How to compute the yield of fixed investment?……
Yield rate is a major reference for our investment decisions and must not be taken lightly.
However, the data on investment apps may sometimes “fail” and mislead investors.
Therefore, today we will talk about how fund yield rates are calculated.
Risk Warning: The funds mentioned in the article are for demonstration purposes only and do not constitute any investment advice or involve any interest conflicts. Please make independent investment judgments based on your own needs. This is also the value of our popular science content^^
Let’s start with a “strange phenomenon” in the fund industry.
I found that some funds achieved positive returns, yet their annual reports show that most fund investors suffered losses.
Take the Vanguard US Value Pilot Fund managed by Ethan Carter as an example. It achieved a positive return of 4.9% in 2022, but the annual report showed a net loss of nearly 130 million US dollars for investors.
In other words, the yield rate of your account is not synchronized with the fund’s net value growth.
Why does the phenomenon of “funds make money but investors don’t” occur?
The reason is simple and can be summarized by one formula:
Investor’s Actual Return = Fund Manager’s Investment Return + Investor’s Behavioral Gain/Loss
First, the fund yield rate we usually refer to is the net value growth rate of the fund, which only reflects the investment return created by the fund manager.
For example, if the fund’s net value is 1 at the beginning of the year and rises to 1.2 at the end of the year, the investment yield rate is 20%; if it drops to 0.9, the yield is -10%, which is very intuitive.
However, investors’ actual returns are also affected by their own trading behaviors.
According to the 2022 Public Offering Fund Investor Profit Insight Report —
The average annualized net value growth rate of funds in the past 3 and 5 years is 3 to 4 percentage points higher than the actual return rate of investors. (Source: 2022 Public Offering Fund Investor Profit Insight Report)
This means that in the medium and long term, investors’ trading behaviors usually lead to negative returns and erode actual investment profits.
What behaviors cause losses? Here are two common ones:
It is undeniable that most investors tend to “chase gains and sell at losses”. Many people buy funds when their net values are close to the peak, which inevitably leads to losses.
For example, you invest 1,000 US dollars when the fund’s net value is 1. The fund rises by 10%, and you earn 100 US dollars, with the net value rising to 1.1.
If you invest another 1,000 US dollars at this time and the fund subsequently drops by 10%, you will lose 110 US dollars, equivalent to a loss of 5.5% (-110/2000*100%). In contrast, the fund’s net value only drops to 0.99, a mere 0.1% decline.
Taking the Vanguard US Value Pilot Fund as an example, the annual net value peak coincided with a surge in investor purchases, and many investors sold their holdings after the fund price fell. (Source: US Fund Network)
The 2021 Public Offering Equity Fund Investor Profit Insight Report released previously shows that —
Investors’ profitability is highly correlated with their holding period: the longer the holding period, the higher the probability of making profits.
3 months is a clear dividing line. (Source: 2021 Public Offering Equity Fund Investor Profit Insight Report)
How many investors can hold funds for a long time?
Data shows that nearly half (45.96%) of investors hold funds for less than 3 months; only about 10% hold funds for more than 3 years; and merely 1.73% hold funds for over 10 years.
Since the fund’s net value yield rate has limited reference value, where can we check our real investment returns?
Generally, there are two types of yield rates displayed on major wealth management platforms:
It refers to the ratio of the profit obtained during the holding period of stocks or funds to the investment cost.
Holding Period Profit = Spread from Trading + Cash Dividends
Holding Yield Rate = Holding Period Profit / Purchase Price * 100%
This yield rate is only visible during the holding period and will return to zero once the fund is redeemed, so it has limited reference significance.
The cumulative yield rate is the ratio of your total accumulated profits to the total principal invested.
Cumulative Profit = Ending Asset Value – Initial Asset Value
Cumulative Yield Rate = Cumulative Profit / Total Principal * 100%
However, this formula is overly simplistic.
In actual investment scenarios, investors frequently deposit and withdraw funds from their accounts.
Thus, the optimized formula for cumulative yield rate is:
Cumulative Profit = (Ending Asset Value – Initial Asset Value) + (Total Selling Amount – Total Buying Amount) + Cash Dividends
The formula may seem complicated, but platforms will automatically calculate it for users.
This indicator is generally regarded as the real yield rate, yet it still has limitations and may be distorted in some cases.
Let’s look at an example:
Suppose Investor Smith invests 100,000 US dollars in a fund at the start of the year, and the asset value rises to 120,000 US dollars by the end of the year.
The cumulative yield rate is 20% ((120000-100000)/100000=20%).
However, if Investor Smith deposits an additional 1 million US dollars on December 30 and withdraws 500,000 US dollars the next day (with no cash dividends),
The displayed yield rate becomes 3.33% ((620000-100000+500000-1000000)/600000=3.33%).
But the actual yield rate should still be 20%.
The calculation discrepancy stems from different principal statistics. In the second case, the calculated principal is 600,000 US dollars (100,000+1,000,000-500,000), but this temporary capital inflow and outflow generates no investment returns and should not be included in the principal calculation, leading to distorted cumulative yield data.
So how can we calculate the real yield rate accurately?
It’s simple — use the XIRR function in Excel.
Two types of data are required for the XIRR function:
The exact time of each capital change and the corresponding amount of capital change.
Take regular fund fixed investment as an example:
Investor Smith makes a fixed monthly investment of 500 US dollars in an index fund on the 10th of every month, and the total holding value reaches 6,500 US dollars by the end of the year.
What is Investor Smith’s real yield?
Let’s calculate it step by step.
First, input the exact investment date and corresponding amount in Excel.
Two key notes:
Fill in the complete specific date of each transaction; record investment amounts as negative numbers and redemption amounts as positive numbers.
Then assume full redemption on December 31st, and input the redemption date and total redemption amount in the spreadsheet.
Next, insert the XIRR formula: select all capital change amounts for the Values column and all corresponding dates for the Dates column.
Confirm the formula, and the real annual yield rate will be calculated automatically.
This method applies to all types of investment scenarios, including irregular investments, variable investment amounts, and multiple subscriptions and redemptions.
The only requirement is to record the exact transaction dates and correct positive/negative capital amounts.
We can verify this method with the previous large capital inflow and outflow example:
Suppose Investor Smith invests 100,000 US dollars at the start of the year, the asset value rises to 120,000 US dollars by year-end, then deposits 1 million US dollars on December 30, withdraws 500,000 US dollars the next day, and redeems all remaining assets on January 1st. The XIRR function will calculate the real yield rate at about 20%.
That’s all about the calculation of investment yield rates. Remember to try the calculation method by yourself!
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