Mutual Fund Yield Versus Return
Before you buy your first share of a mutual fund, you should learn the rudiments of the game. That includes understanding the difference between the the yield and the return. Both have to do with how much money a particular mutual fund earns or costs you, but they are quite different. While you're at it, learn about how the price of your mutual fund may go up or down as a result of the general health of the company stock it holds and how your total return is affected.
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Yield
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Yield is nothing other than how an investor measures the income his mutual fund earns. It does not take into account the change that occurs to the value of a mutual fund in the marketplace. After paying its expenses, a mutual fund will issue a dividend to its holders that is comprised of all the dividends it has received from the company stock it holds. Usually a mutual fund will pay dividends to its shareholders quarterly. To determine the annual yield, multiply that dividend by 4, then divide the total by the current price of the mutual fund to figure the yield.
Market Value
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Normally at the end of each day, a mutual fund will determine its current share price by adding together the value of the total number of company shares it holds, then dividing that number by the shares it has issued. That is the price a new shareholder will pay until the mutual fund reprices its stock the following day, as well as the current value of your shares.
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Return
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Return is the best way to determine a mutual fund's real value. Return is figured by adding the four dividends per share that have been paid to the gain or loss of each share for the past 12 months.
Example
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To illustrate, say that a mutual fund stock is worth $10 at the end of the year. It has paid a total of 20 cents in dividends and it has risen $1 over the year. Therefore, since the dividend is 2 percent and the stock grew 10 percent, the total return for the year is 12 percent. Most investors compare the historical returns over the past year before making an investment in a mutual fund.
Warning
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If a mutual fund has enjoy a particularly good year, it will lure new investors by promoting its recent success. Before you think about investing in a mutual fund, compare its return for 1, 5 and 10 years to get a true glimpse of their past history. Realize that past successes do not guarantee future results.
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