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The Importance of Performance
Everywhere we turn, we read or hear about the latest performance results of mutual funds.
While performance is a key evaluator to help you select a mutual fund,
it is not the only factor upon which you should base your decision. Over
time, performance data is also valuable to chart the progress of your
investment to determine if it is helping you reach your goals.
It is important to understand that mutual funds do not offer a fixed rate
of return: your principal value will fluctuate, and the return on your
investment is not guaranteed. Mutual fund rates of return fluctuate with
market conditions, changes in the valuation of the securities a fund invests
in, or other factors. For that reason, it is helpful to examine performance
over various time periods and keep in mind that performance is based on
historical results and is not intended to project future performance of
a fund.
If you are comparing the performance of several funds, be sure that you
are making accurate comparisons: compare funds with the same investment
objectives and fund policies before you look at the numbers.
Although numerous studies have been done to determine if no-load funds
outperform load funds, the presence or absence of a sales charge really
has nothing to do with performance. What is important to understand is
that total return calculations usually do not take into account the presence
of a load or redemption fees, but are calculated after expenses (management
fees, operating expenses, 12b-1 fees) are deducted. If you are comparing
results of a load fund to a no-load fund, you must adjust performance
results to include the load or redemption fee for a more accurate evaluation.
Average Annual Total Return
Average Annual Total Return is the most widely used barometer of fund performance.
Performance results issued by fund companies, newspapers and magazines,
and many fund information services typically show average annual total
returns for specific time periods: one-year, three-year, five-year,
10-year or since inception.
Average annual total return is defined as the percentage change in a
fund's net asset value, or share price, over a specified time and takes
into account the impact of any distributions, dividends and interest
payments and assumes reinvestment of all income dividends and capital
gains distributions. A rather complicated mathematical formula is used
to calculate average annual total return, so unless you have a finance
calculator, you may want to simply refer to fund company literature
or check published fund performance information sources.
Total Return
Total Return generally shows how well your fund is doing -- without considering
the impact of reinvesting dividends or distributions. It assumes
that you would take distributions and dividends as cash at the end of
the year and not use it to purchase more shares. This is not typically
the number used by most sources in reporting performance results, but
is provided here to generally illustrate how to calculate straight returns
from information you have available.
To Calculate Total Return, multiply the number of shares owned by the net asset
value per share to get the current value of shares, then subtract the
original investment from the result to get the increase in value. Add
any capital gains or dividend/interest distributions paid. Divide that
total (your profit) by the original investment and multiply it by 100
to convert the decimal answer to a percentage. As an example, assume
your shares are now worth $6,500 and your original investment two years
ago was $5,000. Also, suppose that you were paid $500 in distributions
(which you did not reinvest) over that two-year period. Your total return
consists of the $1,500 increase in the share value plus $500 in distributions
for a total of $2,000. Dividing by $5,000, you get .40. Multiplying
that by 100 results in a total return of 40% for the two-year period.
Yield
Yield is a measure of a fund's dividend income or earnings paid out to you, usually
expressed as a percentage of its current share price over a designated
period. For a mutual fund, yield consists of dividend payments divided
by the beginning value of the fund's shares (before any gain or loss
in the price per share). A fund that paid $200 in dividends on a $2,000
investment at the beginning of a period provided a yield of 10%. Yield
is probably most important to investors who are trying to generate current
income. When the yield is added to the percentage gain or loss in the
fund's shares, the result is total return.
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