Measuring Mutual Fund Returns

M utual funds are considered good investments for long-term investors looking to manage risk. But how do you measure the performance of a mutual fund to decide where to put your investment money? A few ways to measure mutual fund returns exist.

Key Takeaways:

  • Mutual funds are typically good for long-term investors.
  • There’s no set way to define ‘good’ mutual fund returns — good return depends a lot on a given investor’s expectations.
  • Mutual fund rates of return may not look great compared to other securities in a given year, but mutual funds tend to outperform other investment types when comparing over the long-term. As a result, mutual funds tend to make a good choice for long-term investors.

What Are Good Mutual Fund Returns?

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Mutual funds are typically designed for long-term investors. Mutual funds try to achieve consistent and smooth growth, and they usually have less volatility than the market overall. As a result, mutual funds historically underperform the market average during bull markets but outperform that market average during bear markets.

Long-term investors often turn to mutual funds because these investors have a lower tolerance for risk. A typical mutual fund investor wants to prioritize minimizing risk instead of maximizing gains when it comes to mutual fund investments.

This expectation plays a big role in understanding how to define ‘good’ returns from mutual funds. A good return has a lot to do with what the investor wants and expects to get from investing in a mutual fund. Most mutual fund investors would accept a return that more or less mirrors the overall market’s average return — and if the number exceeds that goal, they’d likely consider that a very good annual return. On the other hand, investors looking for higher return would likely be disappointed if they get that level of return on investment.

You’ll also want to consider economic conditions as well as the market’s overall performance when defining a good return on investment for mutual funds. If there’s a severe bear market, for instance, an investor would be pleased with a smaller profit than would be considered ‘good’ during more positive market conditions.

Still, there’s no hard and fast number that signifies a ‘good’ mutual fund return. Let’s take a look at a few different ways to look at mutual fund returns to better understand how to assess how a mutual fund performs over time. You’ll encounter different figures when you’re analyzing a mutual fund’s return, so it’s important to understand what each calculation means.

Annual Return

One common way of looking at mutual fund returns is annual return. You can define mutual fund annual returns as the percentage that an investment changes over the period of a year.

By calculating a mutual fund’s annual return, you can analyze that fund’s performance over any particular year that you hold that investment. Investors tend to use this calculation more frequently than other calculations as annual returns are relatively easy to figure out.

You can calculate mutual fund annual returns by first figuring out the initial price of your investment at the beginning of a holding period. Then, find the price of that investment at the conclusion of that yearlong period. Subtract the initial price from the end price to get the change in price of that investment over time. Then, divide the figure you get for change in price by the initial price.

Let’s look at an example: You have an investment on January 1 that has a stock price of $50. By December 31 of that year, the price increases to $75 — a $25 change in price. Divide the $25 by your $50 initial price to get 0.5, or a 50% increase during that year.

Annual return gives investors the total change in price during a one-year period. However, the calculation doesn’t account for the stock price’s volatility during that time horizon.

Annualized Return

Annualized return, on the other hand, is used to evaluate a mutual fund’s performance over time instead of the performance of just one year. The calculation is much more complicated, but all in all, it gives you a way to look at the full investment holding period even if it’s shorter or longer than a year. Annualized return is stated as a yearly rate of return even though it can measure a short or longer time period.

Year-to-Date Returns

You’ll hear the warning time and time again: Past returns on a mutual fund don’t predict results in the future. However, the year-to-date, or YTD, return of a mutual fund typically plays a big role in making a decision to invest money in a given fund. YTD return is the profit your security has made since the start of a given year. You’ll want to look at YTD returns for at least the past three years when deciding to invest.

Make sure you don’t confuse performance YEAR to date with performance YIELD to date. Performance yield to date involves earnings an investment generates over a defined period of time.

To figure out the YTD return, you need to know:

  • Fund price of the first day of trading of the year.
  • The number of distributions the fund made throughout that year.
  • The current share price of the fund.

Start by subtracting the value of your share price at the start of the year from your current share price. Once you get that price, you’ll add in the value of distributions such as capital gains and dividends that were made during the period of that year. Once you add distributions to the increase in share price, you can figure out the rate of return by dividing the total return by the price of the share at the beginning of the year.

Of course, this can also work in the opposite direction if your share price finishes the year lower than the price at the year’s start.

Year-to-Date Returns on a Portfolio

You can also calculate year-to-date returns on your entire portfolio. If you have a portfolio with, say, 30 individual stocks, you can calculate the YTD return of every stock using the above method.

Remember, mutual funds are created from many investors pooling their money together to invest in various securities. Mutual funds are managed professionally, but mutual fund investors can put their own portfolios together through brokerage accounts as well.

You can also calculate the YTD return of your whole portfolio. There’s one key difference, though: Instead of calculating the value of the share price from the beginning of the year, you’ll add the total value of your portfolio on that date. Then, you can add up the current value of your portfolio and subtract that amount from the amount you have for the beginning of the year.

How Do Returns on Mutual Funds Compare to Other Types of Investments?

There are various categories of mutual funds. Overall, annualized mutual fund returns in a given year tend to come out below the average of other types of investments. However, if you take a longer-term perspective, you’ll find that mutual funds generally both outpace inflation and outperform various other kinds of investments. Using long-term analysis, mutual funds may even outperform things like United States Treasury bonds, CDs (certificates of deposit), and gold.

In other words, when you’re looking at the return of mutual funds, long-term annualized returns can provide a more reasonable expectation (if not prediction) than short-term returns, as short-term returns tend to be more volatile.

Mutual Funds With the Best Returns in the Past Ten Years

Looking for some investment inspiration? Here are some mutual funds and exchange-traded funds that have ranked high on lists of the best returns over the past ten years:

  • American Funds American Balanced A (ABALX).
  • American Funds Capital Income Builder A (CAIBX).
  • American Funds Capital World Growth & Income A (CWGIX).
  • American Funds Europacific Growth R6 (RERGX).
  • American Funds Fundamental Investor A (ANCFX).
  • American Funds Growth Fund of America A (AGTHX).
  • American Funds Income Fund of America A (AMECX).
  • American Funds Investment Company of America (AIVSX).
  • American Funds New Perspective A (ANWPX).
  • American Funds Washington Mutual A (AWSHX).
  • Fidelity Contrafund (FCNTX).
  • Invesco QQQ Trust (QQQ).
  • iShares Core US Aggregate Bond ETF (AGG).
  • iShares Core S&P 500 ETF (IVV).
  • SPDR S&P 500 ETF Trust (SPY).
  • T. Rowe Price Blue Chip Growth (TRBCX).
  • Vanguard 500 Index Admiral (VFIAX).
  • Vanguard Total Bond Market II Index Investor (VTBIX).
  • Vanguard Total Stock Market Index Admiral (VTSAX).
  • Vanguard Wellington Admiral (VWENX).

A ny investment decision should take both the time frame of the investment, the purpose of the investment, and an assessment of risk tolerance into account. If you want to invest in order to build wealth over a longer time period, a strategy designed to outpace inflation may be what you need. Mutual funds can be a great way to achieve that.