Understanding Mutual Funds Performance
Mutual funds are a popular type of investment designed to create a portfolio of different securities for the investor. Funds are controlled by brokers that decide how investor funds should be used -- the more investors that participate in the fund, the more money is available to the broker. Good brokers attempt to maximize investor profit while keeping to the intent and regulations of the fund itself. Mutual fund performance is determined by several factors.
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NAV
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NAV stands for net asset value, a measurement of the core value of all the securities in the mutual fund added together. This is essentially the sum market price for all securities. Since the market price is always changing, the NAV is always changing as well. Most funds recalculate this number at the end of every trading day to show investors the innate worth of the fund. NAV values can rise and fall throughout the life of the fund.
Types of Investment
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If the fund only contained stocks and the stocks were never sold and generated no dividends, then the NAV would be the primary performance number. But funds buy and sell stocks, generate dividends and receive profit from many other sources, such as interest derived from bonds bought from both the government and businesses. As a result, the many types of investment the fund uses create extra profit in addition to the core value of the securities.
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Total Return
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Total return is the sum of all investment profit, including profit from dividends and interest, as well as the NAV. This total return gives investors one of the most useful pictures of the mutual fund's performance. There is no single best total return, because funds have many different types of goals. Some may invest in slow-growing stocks that depend on dividends, while others may invest more aggressively in a specific size of company or area of the world depending on the fund's goals.
Fund Yield
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Fund yield and total return are two different numbers. Yield typically refers to only the income that the fund generates and then distributes, the income created by dividends, interest and other forms of payment. Total return includes all profit the fund makes (not just distributed profited) and the value of the fund itself. Fund yield is a useful number if the fund's goal is reliable income.
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