Mutual Funds Performance

What is Performance?

Performance is a fund's ability to make money over time. This can be described simply as the difference between what a share is worth now and what it was worth when you purchased it or, in the case of a fund you are considering, what it was worth five, 10 or 15 years ago. Investors want to see solid growth over time, both within the fund itself and in comparison to similar investments. Performance analysis within a mutual fund also considers the fund's costs -- fees at purchase and sale (loads) as well as ongoing operational costs.

There are two pieces of internal data that are essential when analyzing mutual fund performance: Net Asset Value and total return. The NAV is the fund's share price. This price is calculated once per day and is the total value of all assets held within the fund along with the fund's operating expenses. Mutual fund prices fluctuate, but are not nearly as volatile as stock price because mutual funds pay out all capital gains each year. This means that you cannot completely understand performance from a fund's NAV value -- you must take into account gains and dividends paid out in cash. This is known as the total return; the change in price plus the value of distributions over a given period. Returns are common sense, positive values are good, negative values are bad.

Of course, mutual funds do not operate in a vacuum. There are any number of market forces that effect the performance at any given time. To determine whether fund performance is actually poor you have to compare the fund to other like things, known as benchmarks. The fund company itself will provide benchmarks within quarterly updates and annual reports, typically in the form of indexes. Indexes are groups of stocks or bonds that are similar to fund holdings. Investors compare the performance of the index to the performance of the fund to see how the fund performed in comparison to the rest of the market. You can also compare your fund to other similar funds. This allows you to see if your fund consistently performs at the same or better level than its peers or if it is under-performing.

It's best not to analyze fund performance more than once a quarter as daily and weekly fluctuations are not good indicators of long-term results. All short-term performance must be considered in light of long-term averages. Review your fund's performance at the end of each quarter and compare it to past performance and to benchmarks. If the market as a whole is performing poorly, it is unlikely that your fund will not be affected. Be patient and careful when deciding whether to sell a fund -- make sure you have four to eight quarters of bad performance before you make your final decision.