scorecardWhat is the meaning of Yield and how it is different from return
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What is the meaning of Yield and how it is different from return

What is the meaning of Yield and how it is different from return
Business2 min read

The terms ‘yield’ and ‘return’ are important aspects to discuss under the topic of bond funds. The principal objective of any bond fund is to generate income to the investor. Yield and return refer to the income that an investor earns from the investment. Looking form the surface, yield and return might look similar, but they are different.

What is return?

Return is the total income the investor earned from the investment during a given period in the past. Return usually consists of the interest, capital gain, rise in share price and the dividends. Return is a retrospective concept referring to what the investor has already earned in the past through his investment instrument.

What is yield?

As against return, yield refers to advance or prospective looking into the potentials of an investment instrument. Yield takes into account the income that is likely to come in the form of interests and dividends and does not consider capital gains. While calculating the yield, the income is considered from the perspective of a particular time frame. This calculation is then annualized supposing that the investment instrument will continue to get the interest and dividends in the same rate.

A comparative understanding of yield and return

While yield can be identified as the percentage increase on a given investment, return is the absolute dollar amount. Yield is generally referred to as an annualized figure. On the other hand, return refers to a given period of investment, i.e., one or two or any number of years.

Return also refers to the overall change in value assuming that the capital gains and dividends of the fund are reinvested. But, yield only refers to the income and earnings that the investment has generated. We can say, yield is the calculation of income and not the capital gains.

In the purview of bonds, return refers to the interest paid out on the principal. Yield refers to the price of the bond.

Why understanding the difference is important

If an investor focuses exclusively on a fund’s yields, he is only seeing a part of the picture. It is also important to consider the return which refers to the total income generated by the investment, which gives the combined picture of yield and return.

Summing up

Investors must develop a clear understanding of the ideas of yield and return. They must never get confused between these two terms. If a fund has reported a yield of 7%, it is not an indication of the actual returns on your investment. In any given year, aspects like the share price of the bond fund, capital gains distributed among the shareholders, the investor’s tax situation can all work together to impact the return you will get from the investment instrument after deducting the taxes. The daily fluctuations in the share price can also can also impact the total return. Therefore, in any given year, these fluctuations can cause the return to exceed or fall than the fund’s yield.