Portfolio & Investment-Year Methods
To credit interest on money that arrived in a fund in different years, the portfolio method blends everyone onto one averaged rate, while the investment-year method tracks each deposit's own vintage rate until it grades into that shared rate.
By the end you'll be able to read an investment-year rate table, trace a deposit's own path of rates through its grading period, and compare its accumulated value against the flat portfolio-method alternative.
Predict: in a period of rising new-money rates, does the portfolio method over- or under-credit brand-new deposits compared with the investment-year method? Pick the most recent deposit year below and compare the two accumulated values to check.
Pick a deposit year to trace its investment-year path (highlighted in the rate table) against the flat portfolio path that same 1000 would have earned if every dollar were credited the fund's blended rate for each calendar year instead.
| Deposit year y | Year 1: i₁^y | Year 2: i₂^y | Year 3+: portfolio i^{y+2} |
|---|---|---|---|
| 2022 | 4.00% | 4.20% | 4.50% (2024) |
| 2023 | 5.00% | 5.20% | 5.00% (2025) |
| 2024 | 6.00% | 6.20% | 5.50% (2026) |
| 2022 | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| 3.50% | 4.00% | 4.50% | 5.00% | 5.50% |
The investment-year method credits this deposit 30.03 more over 3 years — the newest money is earning the still-rising new-money rate that the portfolio's blended average hasn't caught up to yet.
Two funds can hold identical investments and still credit their depositors differently, because crediting interest is a bookkeeping choice, not a law of finance.
A pension trust or an insurer's general account takes in money all year, every year, and market rates keep moving. The portfolio method just pools it all and pays everyone the fund's overall blended rate — simple, but when rates are rising, new money is earning less than it could have gotten on its own, subsidizing the older, lower-rate money it's blended with. The investment-year method fixes that by tracking each dollar's arrival year and paying it that year's new-money rate for a while, so freshly deposited money isn't dragged down by the blend.
With a grading period of 2 years, a rate table gives 2023 deposits i₁ = 6.0%, i₂ = 5.5%, and the 2025 portfolio rate is 4.5%. A 1000 deposit made in 2023 is credited its own rate for years 1–2, then the 2025 portfolio rate once it grades: \(1000 \times 1.060 \times 1.055 \times 1.045 \approx\) 1168.6. Notice year 3 uses the portfolio rate, not a third investment-year rate — the table only carries rates out to i₂.
Same rate table, a different deposit: 2024 gives i₁ = 5.0%, i₂ = 4.8%. Find the accumulated value of a 1000 deposit made in 2024, after just 2 years (before it reaches its grading point, so no portfolio rate is needed yet): \(1000 \times 1.050 \times 1.048 = \) ____
Reveal the answer
\(1000 \times 1.050 \times 1.048 = 1000 \times 1.1004 \approx\) 1100.40. No portfolio rate was needed because both years used are still inside the 2-year grading period — the deposit hasn't graded yet.
More info — reading the table the right way
The easiest mistake with an investment-year table is reading it the wrong direction. For the first m years, follow the deposit's own row across — that's its diagonal of vintage rates, i₁^y then i₂^y and so on. Only after the grading period ends do you drop down into the portfolio column, using the portfolio rate for whichever calendar year the money has reached — never a rate from the investment-year columns again. Mixing this up (reading down a column too early, or forgetting to switch to portfolio once the grading period is over) is the single most common table-reading error on this topic. See the Marcel Finan guide in Dive deeper for more worked rate-table problems.
Check your understanding
A fund's investment-year table gives a new 2024 deposit i₁ = 6.00% and i₂ = 6.20%; the grading period is 2 years, and the portfolio rate for the calendar year the deposit reaches its third year is 5.50%. What is the accumulated value of a 1000 deposit after 3 years?
Why does a deposit's investment-year rate eventually switch over to the portfolio rate?
A fund reports a 9.48% time-weighted return for the year, found by chaining together its sub-period growth factors between cash flows. Separately, the same fund credits its account holders' interest using the portfolio method. What's true about these two facts?
New-money rates keep rising year after year. Comparing accumulated values for successively more recent deposit years under the investment-year method versus the flat portfolio method, what pattern should you expect, and why?
Recap
- The portfolio method credits every dollar in the fund the same blended rate, regardless of when it was deposited.
- The investment-year (new-money) method credits a deposit its own vintage rates i₁^y, i₂^y, … for a fixed grading period, then switches it to the current portfolio rate.
- Read an investment-year table across the deposit's own row during grading, then down the portfolio column afterward — never mix the two directions.
- When new-money rates are rising, the investment-year method credits new deposits more than the (lagging) portfolio method would; the gap grows the more recent the deposit is.
Dive deeper
- Marcel Finan — A Basic Course in the Theory of Interest (Exam FM study guide, PDF) Read the rate-table procedure for portfolio versus investment-year crediting.
Sources
- Portfolio and Investment-Year Methods of Crediting Interest