Mutual Fund Performance

On 09/26/2010, in Mutual Funds, by Jordan Wilson

Previously, we looked at fund operating costs.

Today we shall quickly review fund performance data.

As we have covered investment return considerations a while back, we shall keep this brief.

Total Returns not Change in Net Asset Value

Always use total return when calculating or assessing fund performance.

Total return reflects the period change in the net asset value of the fund plus any income or capital distributions made to shareholders during the period.

It is important not to forget distributions or your results may seem poor.

Annualized not Cumulative Returns

When reviewing returns for periods greater than one year, the performance figures should be on an annualized, not cumulative, basis.

Annualized returns allow for better comparisons between periods.

Net not Gross Returns

Know what is included in the performance data you analyze.

When assessing fund performance, make sure that you review net returns and not gross.

Net returns are those that factor in fund total expenses when determining performance. As every dollar of expense negatively impacts your own return, you want to ensure that all the costs are factored in to the return calculation.

There is a trend to ensure that net returns are reported, but there are still some differences between regulatory jurisdictions in reporting requirements.

My Fund’s 5 Year Annualized Return was 11%

A fund’s performance is important when assessing potential investments and monitoring existing ones.

But knowing a fund’s return in isolation does not provide much information content.

If my fund returned 11% annually over 5 years, is that good?

Maybe. Maybe not.

To determine the answer we always need to put returns into proper context.

We shall consider relative performance in our next post.

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