Mutual Fund Total Returns

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Mutual Fund Total Returns

Since a mutual fund can provide income to its shareholders in a number of ways, how can you determine how well your fund is doing?

What is total return?

The total return is the sum total of a fund’s growth. It includes capital appreciation (or loss) of its net asset value, and current income (ordinary dividends and capital gains dividends). Here is a hypothetical example:

Because losses are figured into total returns, it is possible to have a total return that is negative, despite dividends. For example:

Total returns are also calculated on shares that have been sold by the shareholder, in which case they include capital gains (or losses) and dividends earned on the shares prior to their sale.

How total returns are expressed

Funds usually prefer to express total returns in terms of percentages. This makes it easier to compare fund performances. As an example, if a fund appreciates 10 percent during a given year and it has a 6 percent dividend yield, then its total return will be 16 percent. If a fund’s total return is less than its yield, then there has been a loss. Specifically, the net asset value has dropped. For example, suppose a fund with a 9 percent yield has a 2 percent total return. We can see that its net asset value has dropped by 7 percentage points.

The concept of total return gives investors a way to determine the real value they are receiving from their mutual funds, as well as a means of comparison-shopping among funds.