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Mutual Funds
Funds and Performance |
"Past performance is no indication of future
success."
Just because a fund had great returns last year doesn't mean it will beat or even match
those same returns this year -- in fact, it's possible the fund may lose money.
Performance is based on historical data only and is not intended to project what will
happen in the future.
Never pick a fund based only on it's one year rate of return. Look for funds with
consistent long-term performance when compared to similar funds -- make an apples to
apples comparison. Use different time periods to judge performance. 10-year periods
normally provide the most valuable data because you're able to see how well the fund has
weathered different economic and market conditions.
And be wary of mutual funds that are listed or ranked in financial magazines. They're
often touted as having the "best returns" or being one of the "safest
funds". Magazines need to have a great cover each month if they want to sell
subscriptions -- plain and simple.
Measuring Performance
Total return is one of the best indicators of a fund's performance. It takes into account
reinvested dividends or capital gains and any increase in the fund's net asset value
(NAV).
Total return is reported in one of two ways: Cumulative Total Return and Average Annual
Total Return. Each offers a unique representation of the numbers.
1. Cumulative Total Return
Cumulative return is a straight percentage that shows how much a fund has increased in
value -- the total profit or loss over a specific period of time (such as one year). This
percentage is generally not reported by fund companies because it's more difficult to
compare. Cumulative returns are computed by assuming all distributions will be reinvested.
Example: Your original investment of $5,000 is worth $8,500 five years later. You
received $500 in distributions which were reinvested. Your cumulative return is computed
by taking the increase in share value plus reinvested distributions and dividing it by
your original investment. In this case, $3,500 + $500 divided by $5,000 equals .80.
Multiply this number by 100 and you arrive with a cumulative total return of 80% for the
five-year period -- not bad.
2. Average Annual Total Return
Widely use percentage that shows the amount a fund's net asset value has changed over a
specific amount of time -- since inception, 1-year, 5-year, or 10-year periods. This
number is computed using a more complex formula and assumes you reinvest distributions.
You'll find this percentage in fund literature, newspapers, magazines, and online
services.
Keep in mind, your personal return may differ from the total return reported by your fund
company. This may occur because you've taken distributions as cash instead of reinvesting
them or you've made additional investments or redemptions during the specified reporting
period.
Next: Evaluate Mutual Funds
Mutual Fund Calculators:
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• How do growth and income
funds compare?
• Which is better: a front
or back load?
• Which is better: load or
no load?
• How much do fees affect my
return? |
