Measure Your Mutual Funds Performance

Measuring Mutual Funds Performance

(MP) Investing in mutual funds is a serious business, and knowing with certainty whether you’re winning or losing is the subject of exactly how to measure performance. Allowing your mutual funds to go unchecked resembles letting a 2nd grader grade his own math test —it’s just not wise.

We invest in mutual funds because we’re in quest of a return on our money. Measured over a given time period, a mutual fund’s performance is merely the sum of its capital appreciation and income generated, divided by the original amount of the investment, that’s expressed as a percentage. The term for this composite calculation is total return. We’ll get into this in a minute, but if you haven’t yet read “A Poor Man’s Guide to Mutual Funds,” do so now. O.k., you’re back. Let’s continue…

Understanding mutual funds total return

BE careful, because a hefty sum of mutual fund investors don’t have a clear understanding of a fund’s total return. Let me explain, the relationships between a fund’s net asset value (NAV), yield (income) and capital gains distributions can be confusing. Did you know that a fund’s NAV can fall and you can still make money? Or that a fund can yield less than 1%—in fact, it may yield nothing at all — and yet its returns can still be at the top of the charts?

Before we go further, let’s consider two key ingredients of total return. You can earn money from your investment in two ways: income (yield) and capital appreciation.

For stock investors, calculating and understanding their total return is a must. By comparing how total return is derived for both growth stocks and mutual funds, you can expect to better understand how this measure performance for mutual funds.

Measuring Mutual Funds Performance

Mutual funds performance yardsticks

1. Check your mutual fund returns

Start by reviewing your asset allocation. Chances are high your allocation is too conservative. You should have a minimum of 60% of your allocation invested in stock funds with a emphasis on growth stocks. Bring your allocation up and you should see your returns increase.

2. Are your mutual funds measuring against similar funds?

It is best to every so often check out the performance of comparable funds. Fund comparisons are so easy these days, that there really isn’t any excuse for letting this slide. You’ll find comparison reports in Money, Kiplinger, SmartMoney, Business Week, Forbes, Barron’s, Morningstar and Value Line. I’m not telling you this to keep you jumping from fund to fund in search of high returns. Just to make sure your funds are performing on par with the competition.

3. If your mutual funds aren’t delivering

It’s possible you’ve made a bad choice in individual funds, however it could be the funds you opted for have fallen temporarily from favor. In case your fund is doing poorly and others in the same category are doing well, give it a year to catch up. If it doesn’t, sell and buy into a fund that is undoubtedly beating its peers.

4. Keeping track of lots of funds

You should own enough funds to be adequately diversified though not so many that managing them becomes a burden. You don’t actually need three or four funds from each category. Here would be all the funds it’s important to own –spread out over your tax-sheltered retirement investing plans and taxable investment accounts:

  • Large-cap value
  • Large-cap growth
  • Small-cap growth
  • Balance or income funds

5. Coordinating taxable and tax-sheltered investments

You should take the best of what your 401k has to offer and fill the gaps with funds brought outside the plan. Why? Because you want to share as little of your profits as possible with Uncle Sam. By drawing lines between which funds should be in your tax-sheltered accounts and which best fit in your taxable accounts you can surely try this:

What to do?

To strike the best balance between your taxable and tax-exempt accounts –

You would:

Place investments paying the highest income in your tax-sheltered retirement accounts because they will grow tax free, every year. This includes bond funds, income and balance funds.

Place investments with the best growth potential in your taxable investment accounts so when you sell, that growth will be taxed at favorable capital gains rate. This includes growth stocks as well. Now get $100 in Transfer Fees Refunded. No Set-Up Fees. No Annual Fees.

Mutual fund Indexes

  • When measuring any fund’s performance, it’s crucial to use the right benchmarks. Listed below are those to use when comparing:
  • Funds that invest in stocks of medium-sized companies, those with market capitalizations of about $5 billion. The S&P MidCap 400 Index.
  • Conservative, large-cap stock funds that invest mostly in blue chips. The Dow Jones industrial average or the Russell 1000 index.
  • Most stock mutual funds. The NASDAQ Index, the Wilshire 5000 Equity Index, the S&P 500 or the Value Line Index.
  • Index funds. The index whose performance they’re supposed to reflect, most often the S&P 500.
  • Aggressive-growth, small-cap stock funds. The Amex Market Value Index, most often the S&P 500.
  • International stock funds. The EAFE Index, short for the Morgan Stanley Capital International Europe, Australia, Far East Index.
How often should you measure performance?

Before you buy, you should see performance figures for the past three years are available. Less time than this, and the fund hasn’t had time to build a measurable track record. More time than this, and you begin to go back to when market conditions were different.

After you’re in a mutual fund, it is best to track performance quarterly with a thorough review done each year. A quarterly update is often sufficient to make sure performance is on target –that you’re getting what you paid for –but not so often that fund-watching becomes a burden.

Don Briscoe
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Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
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