Advice on which funds to buy is easy to come by, but it’s essential to scrutinize the quality of that advice and the credentials of the person offering it.
Consider what’s being promoted and who stands to benefit before making any decisions.
You can evaluate a fund by:
- Tracking changes in its share price, or net asset value (NAV)
- Determining its yield
- Calculating its percent return
You can then compare the fund’s performance to similar funds from different companies or to other potential investments, such as individual stocks or bonds.
However, since return and yield are calculated differently for each type of investment, there’s no straightforward formula for comparing funds to individual securities.
Mutual fund ROI formula
A fund’s net asset value (NAV) represents the dollar value of a single share of the fund. It’s calculated by dividing the current value of the fund’s total assets, minus fees and expenses, by the number of outstanding shares. The NAV rises when the value of the fund’s holdings increases. For instance, if a share of a stock fund is priced at $15 today, up from $9 a year ago, this suggests that the value of its holdings has grown, expenses have decreased, the number of outstanding shares has decreased, or some combination of these factors has driven the change.
Looking to grow your wealth?
Let me help you make your money work for you
Managed Investment Accounts – harness the expertise of professional asset management. I’ll focus on growing your wealth, so you can focus on living your best life.
Automated Trading System – effortlessly grow your capital with our automated trading solutions
Yield measures the income a fund generates as a percentage of its NAV. For example, if a long-term bond fund with a NAV of $10 pays an income distribution of 58 cents per share, it offers a 5.8% yield.
You can compare a mutual fund’s yield to the current yield on similar investments to determine which offers a better return. For instance, the performance of a bond fund is often compared to individual bonds or bond indexes to gauge its relative strength.
A fund’s total return reflects its overall change in value, including any reinvested distributions. It is usually reported as a percentage, or percent return, calculated by dividing the total dollar return by the initial investment.
For example, if you invest $8,000 and the total return over one year is $832 (comprising a $700 increase in value plus $132 in reinvested distributions), the annual percentage return would be 10.4%.
Tracking your mutual fund returns
The most precise measure of a mutual fund’s performance is its total return, which accounts for both the change in value and reinvested distributions. This total return is reported over various time periods, often extending back as far as the fund has been in operation.
For periods longer than a year, the total return is annualized, meaning it’s converted to an annual figure. This is done using a geometric mean, which is more accurate for sequentially compounded returns than a simple average. Annualized returns capture the impact of gains and losses over the tracked period, but they do not indicate whether the performance was consistently steady or marked by significant fluctuations.
Key factors influencing total return include the overall market direction where the fund is invested, the performance of the fund’s portfolio, and the fund’s fees and expenses.
Why mutual funds are good for long-term investing?
Most financial experts recommend viewing mutual funds as long-term investments. They advise against focusing on short-term fluctuations or chasing the top-performing funds of the year. Often, the fund or category with the highest return one year won’t necessarily be at the top the following year.
Experts suggest that some funds consistently deliver returns aligned with their benchmarks year after year, even if they don’t make the top or bottom of performance charts.
Holding a fund for a longer period can also help amortize the cost of a front-end load if you’ve invested in Class A shares. In the short term, this load reduces your return because the sales charge is deducted before your principal is invested. However, over time, the impact of this charge may diminish. Frequent trading can lead to repeated sales charges, which could erode a significant portion of your potential gains.
Maintaining a long-term perspective with a diversified fund portfolio helps you avoid missing out on growth periods that often follow market downturns. Additionally, selling a fund during a dip locks in any current losses, although this might sometimes be preferable to the risk of further losses.
Calculating Mutual Fund Performance. ROI Formula by Inna Rosputnia
Wishing you a great week!
Want Your Money To Grow?
Subscribe to get free research, trading lessons, and more insights.
(We do not share your data with anybody, and only use it for its intended purpose)
