Personal rate of return (PRR) is an assessment of the value of returns for an individual participant in a mutual fund, investment pool, or other investment. Individual returns can differ from those of the fund, for a number of reasons, and a calculation can determine precisely how much investors are earning with their activities. They can contrast these with the overall return on the fund, and if these numbers are radically different, they may want to seek advice from financial advisers. Some investment firms calculate PRR for their clients and provide information about it in account statements, while other expect their investors to do this on their own.
An investor’s personal rate of return can depend on the precise timing of purchases and sales. Someone with a retirement account, for example, might make multiple deposits over an accounting period. The firm’s overall rate of return might be slightly higher than the individual rate of return because the investor may have missed a key window by depositing a little too late.
To calculate this number, an investor or analyst can look at performance on an individual account between deposits and withdrawals and compare it against fund performance. Between the first and the fifteenth of the month, for example, the personal rate of return might be three percent, and a deposit on the 16th could be followed by earnings of four percent until a withdrawal on the 25th. This time-weighted calculation allows individuals to see their actual returns, with additions and removals factored out to show the overall return on the investment.
Timing deposits and withdrawals can be important for investors who want to keep their personal rate of return high. If, for example, a dividend payout is due, it might make sense to wait to withdraw or sell investments until after this payout, to benefit from the distribution. Likewise, depositing funds and making purchases in time to take advantage of payouts can be beneficial. Some fluctuations are difficult to predict, and a financial adviser may not be able to offer definitive advice on the best time to make changes to an investment account.
This number is important to consider when investors think about where they want to invest. In addition to looking at the overall rate of return, it may help to ask for information on personal rate of return for sample investors in the pool. Investors should be aware that the returns listed on the fund overall may not be available to them because of variations caused by fluctuating personal balances.