Whether a mutual fund aims for current income, long-term growth or a combination of the two, there are three ways to track its performance — and judge whether or not it is profitable. You can evaluate the fund by following changes in share price or net asset value (NAV), figuring yield and calculating total return. You can compare a fund’s performance to similar funds offered by different companies or you can evaluate the fund in relation to other ways the money could have been invested — stocks or bonds, for example. Because return is figured differently for each type of investment, there isn’t a simple formula for comparing funds to individual securities.
Before we get into the details of performance I want review the basics of mutual funds. Mutual funds are investment firms that manage pools of investors’ money. Individual investors buy shares of mutual funds and the funds invest the money in certain specified types of assets such as common stocks, tax-exempt bonds and mortgages.
The share price of a mutual fund is the NAV. The NAV is the dollar value of one share of the fund’s stock. You figure the NAV by dividing the current value of the fund by the number of shares. The NAV increases when the value of the underlying investments, be it stocks, bonds or other investments, increase. For example, if a share of a stock fund costs $15 today and $9 a year ago, there’s been a capital gain (or profit) of $6 a share (or about 66 percent) before expenses.
Yield measures the amount of income a fund provides as a percentage of its current price, or NAV. A long-term bond fund with a NAV of $10 paying a 58 cent dividend per share provides a 5.8 percent yield. You can compare the yield on a mutual fund with the current yield on comparable investments to decide which is performing better. Bond fund performance, for example, is often tracked in relation to individual bonds.
Total return tells you how much — as a percentage — they’ve made or lost on an investment over time. It’s figured by dividing the current value of an investment, plus distributions, by the cost of the initial investment. (The current value is the number of shares times the NAV.) If the distributions have all been reinvested, they are already included in a current value and don’t have to be added as a separate item.
Lipper Analytical Services provides daily performance indexes for nine categories of mutual funds. The gain or loss of a particular fund is shown over the last week and since the end of the last year and can be compared with the performance of all the funds in that group.
Finally, another measure of a fund’s performance is how its stacks up against the movement of a major market index that reports on the same kind of investments the fund makes. For example, a gain or loss in a general stock fund could be compard with the performance of the Standard & Poor’s 500 Stock Index, while a bond fund could be compared with a government/corporate bond index. However, index figures don’t include management fees, reinvested dividends or interest, or the costs of buying and selling, so they can’t be compared directly to total return figures.
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Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.