How to Calculate Fund Performance
Total return is a measure of performance used to evaluate investments or a pool of investments such a fund. Total return includes the total cost of ownership and total gain on the investment over a specific time period. The metric captures the only two ways to make a return on an investment security: income and capital appreciation. Income includes dividends or interest payments whereas capital appreciation is the change in price for the assets in the fund.
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Instructions
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Review the formula for total return for a mutual fund. The formula for total return for a mutual fund is the sum of the change in a fund's net asset value (NAV) and distributions over the given time period. The most common time period is year over year.
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Walk through the calculation. Another way to write the calculation for total return is:
Total Return = ((Current Share Price x Last Reinvestment Factor) - Initial Price) / Initial Price.
The reinvestment factor is based on total distributions (dividends plus capital gains) for each period. This number should also be provided on your broker statement.
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Calculate the year 1 and 2 reinvestment factor. The reinvestment factor equals: ("year 1 total distribution" divided by "year 1 share price") plus 1. The year 2 reinvestment factor equals: ("year 2 total distribution" x "year 1 reinvestment factor") divided by "year 2 share price") plus 1, and so on. Another way to write this is:
((Year 2 Total Dividends x Year 1 Reinvestment Factor) / Year 2 Current Share Price)) + 1 = Year 2 Reinvestment Factor
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Put it all together. Sub all values into the equation and calculate the total return for the fund. In general, the higher the return, the riskier the investments.
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