What Is the Average Return on a Mutual Fund?
Mutual funds represent an investment in a basket of securities. The mutual fund may be a stock mutual fund, a bond fund, or a balanced fund holding stocks, bonds and cash. A mutual fund's return is compared to similar funds. For example, large cap domestic mutual funds are evaluated against a benchmark large cap index and investment grade bond funds are matched to an investment grade bond index. A mutual fund average return is based on its benchmark index return.
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Benchmark Index Returns
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An index is a number of specific securities used to track a defined type of security. One of the most widely known indexes is the Dow Jones Industrial Average (DJIA). The DJIA is composed of 30 large blue-chip companies representing various industries. An index becomes a benchmark when it is used to measure the performance of mutual funds, stocks or other securities. The Standard & Poor's 500 is another commonly quoted index. It represents 500 domestic companies on the stock market.
Finding Benchmark Returns
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An investor researching which mutual fund to purchase initially needs to find out which benchmark a particular mutual fund or category of mutual funds utilizes as a comparison model. The information can be found in mutual fund data sheets and prospectuses provided by a mutual fund company. The information can also be located on various financial websites.
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Morningstar
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The Morningstar company developed an illustrative model categorizing stock funds. The six components of what is called the Morningstar style box are value stocks, growth stocks or a blend, and small, medium and large cap companies. Key in the fund name or symbol on the Morningstar web site and the latest fund quote, Morningstar style box, and other fund data appear on the fund information page. Other financial websites including Morningstar information on their mutual fund data pages are MSN MoneyCentral and Reuters.
Lipper Leader Scorecard
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The Wall Street Journal quote page includes the mutual fund's category and its Lipper Leader Scorecard. Lipper rates mutual funds from one to five, one being the poorest and five the highest score, on five different elements. The five areas are total return, consistent return, preservation of capital, tax efficiency and expenses. An investor needs to decide which elements are important to their investment strategy. Scores of the various funds an investor may be considering can be compared. The Lipper Indexes on the Journal's Market Data Center mutual fund site lists equity and bond fund indexes with one day, one week, and year-to-date performance. Quarterly and annual performance for the major categories provide one year, three year, five year and t10-year performance figures.
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