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Mutual Fund Performance Measures

Investment performance is one of the most important factors on which investors base their decisions on whether to invest in a particular mutual fund. That is why most mutual fund sources provide so much information on the performance rates. However, performance should not be the only factor that guides your investment decisions.

The examination of performance rates is important, but it reflects past trends and often they don't represent a certain reflection of future performances of the fund. You should also be aware that no mutual fund guarantees fixed returns. Mutual fund returns vary in accordance with the conditions of the market. Additionally, changes in the valuation of securities influence the returns you will gain from a particular mutual fund as well as many other factors.

When deciding on the investment in a particular mutual fund a comparison of it with other funds is a useful tactic to determine whether it is suitable for a parking place of your money. However, you should keep in mind that comparison between mutual funds with similar investment objectives is done. Only after this you can examine the statistics provided for the mutual fund.

Many financial experts argue that no-load mutual funds do better than load mutual funds. However, performance is not influenced in any way by the existence or the lack of such of sales charges. Total return estimations are done after expenses incurred by the mutual fund are deducted. Therefore, the presence of a load or a redemption fee is not reflected in the calculations of total returns. As a result, in order to make more accurate comparisons between a load and no-load mutual fund, you should include the values of redemption fees and the associated loads.

Some of the criteria against which mutual fund performance is measured include:

  • Average Annual Total Return

    Representing the percentage change in the NAV (Net Asset Value), the average annual total return is usually calculated for a specific time period, such as one-year, three-year, five-year and etc. Factors that are taken into account when making the calculations include:

    • Distributions
    • Dividends
    • Interest payments

    Additionally, the average annual total return assumes that reinvestment of all income dividends and capital gains distributions are made.

    Information on the average annual total return is often provided by mutual fund companies, newspapers, magazines and other mutual fund information sources.

  • Total Return

    Total return is another benchmark against which evaluations of the performance of mutual funds is done. It demonstrates how well the fund is performing. In contrast to the average annual total return, total return doesn't take under consideration the effect of dividend and distribution reinvestment. Instead, under total return, the assumption that the investor will withdraw his/her dividends and distributions at the end of the year and use them for other purposes, different form share purchase is made. Total return is not as widely used as average annual total return.

    To estimate total return, follow these steps:

    1. (number of shares x NAV per share) - initial investment = increase in value
    2. increase in value + capital gains or dividend/interest distributions = profit
    3. (profit / initial investment) x 100 = Total Return
  • Yield

    Another measure often used to evaluate the performance of a mutual fund is the yield of the fund. It reflects dividend payments that are divided by the beginning value of the fund's shares. This is done before any gain or loss in the price for one share. Therefore, yield represents the dividend income or other earnings that are paid to investors. It is expressed in a percentage and is calculated for a specific time period. Investors that strive to current income generation consider yield as an important factor.

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