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What Is The Difference Between Yield And Returns?

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Yield and returns is often misunderstood to be one and the same. Actually, there is a difference between the two. Also, it depends on the instrument, time period etc.

So, what then is the difference between yield and returns?

Yield is generally used for debt instruments, particularly bonds, bank fixed deposits etc. Investors often investing in debt often look at interest rates and not the yield. Actually, yield is what you earn at the end of a particular time period.

What Is The Difference Between Yield And Returns?
Let us now explain how yield is calculated with the help of an example. If you place money in a bank deposit, they compound your interest every quarter. So, if you have placed Rs 1000 for one year at 10 per cent interest, then you will not get Rs 100 as interest after one year, which is just the simple interest. You will get more than that, because, the bank compounds interest every quarter. So, in the first quarter it will add Rs 20 of interest to the Rs 100 and you will get interest on Rs 121 from the second quarter.
 

This is how yields work. If your interest is 10% per annum, the chances are that your yield would be around 10.3% after one year, because of compounding.

Now, returns are not often used for debt instruments. For example, you never say I earned a yield of Rs 1000 on shares. You say my return on shares was 10%. So, returns are used to equate with shares. However, the dividend that you receive can be calculated in terms of yield. That is you say "dividend yield".

So, the difference between yield and returns will largely depend on the type of instrument. Returns would also include capital appreciation, in addition to dividend. These days yields and returns are both interchanged freely, though there is a difference between both.

Generally, yields would not take into account the possibility of capital appreciation.

Also, returns tend to look at the past. For example, we could say that, "My returns were 20%". On the other hand yields tend to look into the future. You could say, "the likely yield that I could get is 9.5%".

GoodReturns.in

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Story first published: Wednesday, October 28, 2015, 10:42 [IST]
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