How to Calculate Fund Performance

How to Calculate Fund Performance
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Total return is a measure of performance used to evaluate investments or a pool of investments such a fund. Total return includes the total cost of ownership and total gain on the investment over a specific time period. The metric captures the only two ways to make a return on an investment security: income and capital appreciation. Income includes dividends or interest payments whereas capital appreciation is the change in price for the assets in the fund.

Review the formula for total return for a mutual fund. The formula for total return for a mutual fund is the sum of the change in a fund's net asset value (NAV) and distributions over the given time period. The most common time period is year over year.

Walk through the calculation. Another way to write the calculation for total return is:

Total Return = ((Current Share Price x Last Reinvestment Factor) - Initial Price) / Initial Price.

The reinvestment factor is based on total distributions (dividends plus capital gains) for each period. This number should also be provided on your broker statement.

Calculate the year 1 and 2 reinvestment factor. The reinvestment factor equals: ("year 1 total distribution" divided by "year 1 share price") plus 1. The year 2 reinvestment factor equals: ("year 2 total distribution" x "year 1 reinvestment factor") divided by "year 2 share price") plus 1, and so on. Another way to write this is:

((Year 2 Total Dividends x Year 1 Reinvestment Factor) / Year 2 Current Share Price)) + 1 = Year 2 Reinvestment Factor

Put it all together. Sub all values into the equation and calculate the total return for the fund. In general, the higher the return, the riskier the investments.