Tracking Fund Performance

Introduction to Mutual Funds

There are several formulas for measuring mutual fund performance. The bottom line is whether the fund is meeting your investment goals.

Whether a mutual fund aims for current income, long-term growth or a combination of the two, three are three "technical" ways to track its performance and judge whether or not it is profitable.

Investors can evaluate a fund by:

1. Following changes in share price, or net asset value (NAV)
2. Figuring Yield
3. Calculating total return

You can compare a fund's performance to similar funds offered by different companies, or you can evaluate the fund in relations to other ways the money could have been invested - for example, stocks or bonds.

Net Asset Value (NAV) - A fund's NAV is the dollar value of one share of the fund's stock. It's figured by dividing the current value of the fund by the number of its outstanding shares. That is,
NAV = (Current Value of the Fund) / (Number of its outstanding shares).

A fund's NAV increases when the value of its holdings increases. For example, if a share of a stock fund cost $15 today and $9 a year ago, it means the value of its holdings increased about 66% per share, and you could sell at a profit.

In terms of corporate valuations, the value of assets less liabilities equals net asset value, or "book value".

In the context of mutual funds, net asset value per share is computed once a day based on the closing market prices of the securities in the fund's portfolio. All mutual fund buy and sell orders are processed at the NAV of the trade date; however, investors must wait until the following day to get the trade price.

Mutual funds pay out (distribute) virtually all of their income and capital gains. As a result, changes in NAV are not the best gauge of  mutual fund performance, which is best measured by annual total return.

Because exchange-traded funds and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) net asset value.

Yield - measures the amount of income a fund provides as a percentage of its NAV. A long-term bond fund with an NAV of $10 paying a 58-cent income distribution per share provied a 5.8% yield. And the formula is: Yield in % = 100* (Distribution per share) / (Price per share). So in our example, 100 * $0.58 / $10.00 = 5.8%.

You can compare the yield on comparable investments to decide which is providing a stronger return. Bond fund performance, for example, is often tracked in relation to individual bonds or bond indexes.

Simply put, the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

Total Return - A fund's total return is the annual amount your mutual fund investment changes in value plus the distributions the fund pays on that investment. It's typically reported as percentage return, figured by dollar value of the total return divided by the amount of the initial investment. That is, % return = 100 * (total return in $) / (initial amount in $).

For example, an $8,000 investment with a one-year total return of $1,250 ($1,000 increase in value plus $250 in reinvested distributions) has an annual percentage return of 15.6%.

Relationship among NAV, Yield and Total Return - There is a relationship among these terms. Each represents something a little different than the other. Often times, the terms yield and return are used interchangeably.

A fund's NAV can fall and you can still make money. A fund can yield less than 1% or nothing at all, and you still can make money. When it comes to fund's performance, neither NAV nor yield will do. Total return is the number to watch.