Return
Also written Investment return · Rate of return · Return on Investment · Return (evaluation factor)
The reward for postponing consumption — the difference between what an investor gives up today and the larger amount received later, measured in several ways depending on the purpose.
In plain language
When you invest, you give up spending money today in exchange for more money later. Return is the difference between the two.
The workbook's Chapter 1 definition is exactly that: people make a trade-off between postponing current consumption and an expected higher amount for future consumption, and the difference is referred to as return.
Chapter 10 then adds a warning that runs through the whole PMS paper: rate of return has many possible definitions, and there is one right definition for each purpose. A distributor reporting an investor's own experience, a portfolio manager advertising an investment approach and a tax planner estimating what the client keeps are all measuring return — but not the same return.
How it works
The workbook's return measures, each with its own number:
| Measure | What it answers | Workbook example |
|---|---|---|
| Holding period return | Total gain over the period, including income | ₹1,00,000 → ₹1,20,000 = 20%; with ₹5,000 income = 25% |
| XIRR | Annual return with irregular contributions | ₹75,000 contributed 2015–2019 → ₹1,05,920 = 15.15% |
| TWRR | Manager's return, neutralising client cash flows | 49.09% over two years = 22.10% a year |
| Gross vs net | Before and after fees and expenses | 20% gross vs 13.88% net on ₹1 crore |
| Post-tax | What the investor keeps | 13.88% × (1 − 20%) = 11.10% |
| Portfolio return | Weighted average of holdings | 14.30% on a four-security portfolio |
HPR formula: HPR = (I + (E − B)) / B, where I is income, E ending value and B beginning value. It assumes all income arrives at the end of the year, but it remains the starting point of performance measurement.
Chapter 1 separates three more ideas: required return (the minimum an investor demands), expected or forecasted return, and realised return. They are three different numbers.
A worked example
Take the workbook's own ₹1 crore example from Chapter 10 (section 10.1.4) and follow a single year through every layer:
| Step | Value | Return on ₹1 crore |
|---|---|---|
| Portfolio grows 20% | ₹1,20,00,000 | 20.00% gross |
| Less other expenses (0.50% of gross value) | − ₹60,000 | |
| Less fixed fee (1.5% of average of ₹1 crore and ₹1.2 crore) | − ₹1,65,000 | |
| Less performance fee (20% above 10% hurdle) | − ₹1,55,000 | |
| Less exit load (2%) | − ₹2,32,400 | |
| Net value | ₹1,13,87,600 | 13.88% net |
| Less tax at 20% (STCG, exit within a year) | 11.10% post-tax |
The same money, the same year, three honest answers: 20%, 13.88% and 11.10%. A distributor who quotes the first figure to a client whose experience will be the third is not lying about the portfolio, but is misleading about the investment.
Why NISM asks about it
Return appears in Chapter 1 (definition, and the required-versus-expected-versus-realised distinction) and dominates Chapter 10 (Performance Measurement and Evaluation of Portfolio Managers, 10% weightage), where calculation questions on HPR, portfolio return and gross-versus-net return are the most predictable numeric items in the paper. Chapter 10's own sample question asks for the expected return of a three-stock portfolio — a weighted average. Chapter 8 (13% weightage) decides which return is reported to whom: TWRR for an investment approach, XIRR for the individual investor.
Common exam traps
- Required return is not expected return, and neither is realised return. Chapter 1 lists all three as different.
- HPR is not annualised by itself unless the holding period is a year. The workbook describes it as point-to-point.
- Gross return overstates what the client earns. Chapter 10 calls focusing on it "misleading".
- Post-tax return is computed by the investor or adviser, because investors sit in different tax brackets; performance is communicated pre-tax.
- PMS fees are not deducted when computing capital gains tax (Chapter 10 note and Chapter 11). The workbook nonetheless applies the tax rate to the net return in its post-tax illustration — follow the illustration for calculation questions.
- Portfolio return is a weighted average; portfolio risk is not. Risk depends on correlation too (Chapter 10, section 10.2.2).
Where this is taught
- Series XXI-B · Chapter 1: Investment Landscapeintroduced here
- Series X-B · Chapter 6: Miscellaneous aspects of Retirement Planningintroduced here
- Series SEBI-ICE · Chapter 3: Financial Planningintroduced here
- Series XXI-A · Chapter 1: Investmentsintroduced here
Related terms
- Holding period returnThe total of coupons, income earned on reinvesting them and any capital gain, expressed as a percentage of the purchase price — a crude return for the period actually held, with no compounding in it.
- RiskThe possibility that actual returns turn out different from what was expected — measured as the dispersion of returns around their own average, and not the same thing as uncertainty.
- XIRRExtended Internal Rate of Return: the annualised return on an investment with irregular cash flows, found by assigning a date to each flow. PMS reports it for each investor’s own experience.
- Time Weighted Rate of ReturnA compounded return that neutralises client deposits and withdrawals by linking sub-period returns, so it measures the manager’s decisions. Mandatory for PMS investment approach performance.
- Required Rate of ReturnThe minimum return an investor expects before committing money: the nominal risk-free rate plus a risk premium. It is not a guaranteed, forecast or realised return.
- SavingThe difference between money earned and money spent. Saving becomes investment only when that surplus is committed for a period in the expectation of getting back a larger amount.
- Total returnThe whole return on an investment for a period: periodic income such as interest, dividend or rent plus the gain or loss in the value of the investment itself.
- PortfolioUnder the SEBI PM Regulations, the total holdings of securities and goods belonging to any person — the basket whose return is a weighted average but whose risk also depends on correlation.
- Gross returnThe total return on an investment before deducting any fees, expenses or commissions. Useful for broad evaluation, but misleading as a measure of what the investor actually earns.
- Post-tax returnReturn after taxes on investment income and realised capital gains: pre-tax return × (1 − tax rate). It is what matters to the investor, but performance is communicated pre-tax.