Is the performance of the fund inferior or superior? How tax-efficient will be the fund in bringing these returns? Do the fund returns commensurate with the risk taken by the fund manager to achieve them? It is very important for every savvy investor to seek answers to these questions while evaluating Mutual Fund Returns.
Prior to getting yourself into mutual funds, it will be good to understand the basic data, which is reported daily in financials.
The total return will include more the increase or even decrease in the share price of the fund. It will also assume reinvestment of almost all the dividends in addition to both the short-term and long-term capital gains in the fund at a distribution price.
Compound Annual Return:
Also called an average annual return, the compound annual return is nothing but a calculated number, which describes the rate to develop the investment by assuming a uniform year-over-year growth at the time of a five-year period.
It will compare the mutual fund’s performance against its peers. The Relative return is probably the difference between the return of the fund and the return of a perfect benchmark in total over the same period.
After-tax return is the return, which is realized for non-qualified accounts after-tax accounting.
Certain fund managers usually take more risks than others so that it is essential to evaluate the fund returns in line with the number of risks, which fund manager take to bring that return. This return is typically measured with the help of Sharpe ratio. If the ratio is higher, the fund return is better per unit risk.
Beyond Mutual Funds:
Relative return, Risk-adjusted return, and After-tax return will also be utilized to evaluate hedge funds, separately-managed accounts, and model portfolios of an investment newsletter.