How to Compare Annual Mutual Fund Returns

Investigate before you invest.

Choose a mutual fund, the Securities Exchange Commission (SEC) suggests, by considering fund costs, your own risk tolerance, the fund's objectives and strategies and its past performance, listed in the fund's prospectus that is revised annually and given to all potential investors.

Definition

Investment research firm Morningstar defines annual total return as the calendar year increase or decrease in share value plus dividends received from stocks or bonds the fund owns. The SEC requires a fund's prospectus to show annual returns for every one of the past 10 years as a bar graph and to report returns before and after taxes as a percentage for the last one-, five- and 10-year periods.

Significance

One year's return provides less useful information than a longer history of performance and volatility. Compare annual returns of funds with similar objectives, portfolios and costs to determine relative investment success. The SEC also requires inclusion of the returns of an index that closely matches the fund for comparison.

Considerations

As every source cautions, past performance does not guarantee future returns. Vanguard, a leading mutual fund company, notes that costs and expenses are incurred whether the value of your investment increases or decreases. Remember, too, that you owe taxes on dividends and interest (unless in a qualified exempt plan) even if reinvested, which may reduce your actual return.

References

• SEC: Invest Wisely: An Introduction to Mutual Funds
• Morningstar: Definitions-Total & Calendar-Year Returns
• Vanguard: Fund Stars Can Change; Costs Always Matter