Importance of Performance

Assessing Fund Performance

Investors in mutual funds purchase shares of ownership in the fund and are entitled to their pro-rata share of the fund’s returns. Except for money market funds, which maintain a fixed price, mutual fund share prices fluctuate and are not guaranteed. The rate of return and the value of an investment account will change based on market conditions. When looking at fund performance, keep in mind that these are past results, used to illustrate a particular fund’s record of return, and is no indication of how it will perform in the future. Here are some simple rules to help assess mutual fund performance.


Compare funds that have the same investment objectives. For example, a large company growth fund and a small company value fund will have different performance characteristics.


Evaluate how a mutual fund performs relative to its benchmark. A benchmark is often an index of companies that represent an investment category, such as the Dow Jones Industrial Average, S&P 500 or Russell 2000 Index.

If you are comparing the performance of several funds, be sure that you are making accurate comparisons: compare funds with the same investment objectives and fund policies before you look at the numbers.

Types of Return

Average Annual Total Return

The most widely used barometer of fund performance. Average annual total return is defined as the percentage change in a fund's net asset value, or share price, over a specified time and takes into account the impact of any distributions, dividends and interest payments and assumes reinvestment of all income dividends and capital gains distributions. Performance results typically show average annual total returns for specific time periods: one-year, three-year, five-year, and 10-year or since inception.


Yield is a measure of a fund's dividend income or earnings paid out to you, usually expressed as a percentage of its current share price over a designated period. For a mutual fund, yield consists of dividend payments divided by the beginning value of the fund's shares (before any gain or loss in the price per share). A fund that paid $200 in dividends on a $2,000 investment at the beginning of a period provided a yield of 10%. Yield is probably most important to investors who seek current income.

Total Return

The performance of an investment, including yield as well as changes in per share price, calculated over a designated period of time.

After-Tax Return

The Securities and Exchange Commission (SEC) requires mutual funds to disclose standardized after-tax returns. This disclosure is intended to help investors understand the impact taxes have on the performance of their mutual funds. The after-tax return is not relevant if you invest through a tax-deferred account, such as an IRA or employer-sponsored retirement plan, since after-tax returns are calculated when most investors are in lower tax brackets. Consult  your tax advisor for your individualized after-tax return.