How to Rate Management of Investment Funds

Determining how investment funds have been managed requires that an investor look beyond the published rate of return. It requires an analysis that considers fees paid, tax liabilities, comparison to historical data and existing industry indexes. A fund that is getting a high rate of return but creates a huge capital gain liability might not be the most effective fund to invest in.

Things You'll Need

• Statement
• 1099-B Capital Gains Form

Instructions

How to Rate Management of Investment Funds

1. Reading an investment statement that shows an investment grew from $10,000 to $11,000 in a 12-month period, we will first calculate the annual growth rate. Assume the anticipated rate of return was 9 percent in a moderate investment portfolio. There are $900 in short-term capital gains taxed at 28 percent.

2. Take the year end value and subtract the initial value. Divide this number by the initial investment value. With the example: $11,000 - $10,000 = $1,000 / $10,000 = .10. Multiply this by 100 to get the rate of 10 percent.

3. Compare this rate against the original investment objective and what you hoped to get from the investment. Compared to the example, the rate of return has exceeded expectations, suggesting that this investment manager is doing well.

4. Compare the return to the index for moderate funds, in this case the S&P 500 which had a 8.7 percent rate of return for the same period. Once again this investment manager is doing well compared to expectations and indexes.

5. Determine the tax paid on the capital gains. In this case, $900 multiplied by the 28% tax rate equals $252.

6. Subtract the tax owed from the final investment value, thus $11,000 - $252= $10,748. Then calculate the after-tax rate of return: ($10,748 - $10,000)100 = 7.48 percent. By calculating the tax liability of the portfolio, we see that this manager underperformed compared to expectations.

Tips & Warnings

• Tax calculations are not applicable to tax-deferred accounts such as IRAs or annuities. Therefore managers can buy and sell securities more frequently to get a higher rate of return without generating high tax consequences.

References

• Invest Words - Rate of Return
• Money Chimp - Capital Gains Calculator