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Mutual Funds Returns

When discussing mutual funds, a return is how we measure the amount an investment has increased or decreased in monetary value over a specific time frame. If it is an annual return it is the percentage increased or decreased over a twelve month time frame. If you were to invest for example $1000.00 and after a year the investment's value is $1100 then the annual return would be 10% or $100. the actual return though must take into consideration inflation over that period and adjust accordingly to get the annual return on the investment.

To calculate a Fund's Total Return there is a formula. For example if we wanted to figure out the XYZ Fund's return we begin with its net asset value (NAV) which in 1995 just happened to be $10. A distribution to investors of $2 was made during the year and at the end of year the NAV ends up being $13.50. Now if you add on the distribution you get a total of $15.50. From the $15.50 you take out the original $10 which leaves you $5.50. Now you divide the $5.50 by the starting NAV of $10 and you end up with 0.55 and multiply this by 100 to come up with a total return for the XYX Fund for 1995 of 55%. So the formula for total return is: Final NAV + distributions - original NAV/ (original NAV) x 100.

There is also a formula for calculating your return which is: (current value of units - initial investment)/ (initial investment) x 100. To use another example if you invested $1000 in a mutual fund then reinvested all distributions of $200 when the year ended you would have an investment account of $1200. So you would subtract original investment off to arrive at $200. You then divide the $200 by the original $1000 and multiply that answer which is 0.2 by 100 to arrive at a return of 20%. Mind you, that is not taking into consideration any commissions or other costs involved with the transactions. Those have to be deducted from current value of units and will reduce your return.

Another return on investment is the compound average annual return. Receiving returns on your return of your original investment is called compounding. If you read quotes for compound annual returns in fund brochures or other advertisements, it is the total fund has returned as well taking into consideration capital gains and losses as well as dividends and expressing them as an average yearly growth percentage.

Investors should know that returns on any fund, only reflects the particular market it is invested in. A good example of this would be that you will not receive a 25% return if the stock market is down by 10%. A fund could even show a small positive return but it may not be enough for you recoup transaction costs associated with that investment. Four points to remember when it comes to return on investments are: returns show increase or decrease in investments, compounding earns returns of your returns, compound average annual returns show how wealth grows over time and transaction costs reduce returns.

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