What is a good annual return from a mutual fund?

If you want to multiply your money easily and quickly, it is best to analyze the best option before jumping into the water. What do we mean? what if you want get a good annual return on your investment in a mutual fund, you need to compare several instruments and determine which one is the best for your pocket.

To do so, it will suffice to identify and evaluate several factors, such as the bottom type, the term and the performance promised by him bank or cooperative. For example, the return on equity mutual funds is typically much higher than on bond mutual funds.

How do I know if my mutual fund is profitable? Annual return vs. annualized return

Before accessing a mutual fund, the first thing you should do is determine its annual and annualized return. The difference? Annual return is the fund’s profit or loss in one year, while annualized return is the average rate of return earned over a multi-year period.

Let’s see it in an example. Imagine that your mutual fund reported a return of 15% last year, while its historical return in 10 years is 10%. The profit you made last year -15%- is the annual return, while the average of the last 10 years or historical return would be the average annualized return.

What does this mean? That during some of those years the mutual fund made much higher profits, while in others, the profits were lower. To calculate this factor, each annual return is added together and divided by the number of years elapsed. It is the easiest way to get the historical average.

How to calculate the annual return of a mutual fund?

To understand how annual return works and, of course, the annualized return, it is best to see how it is calculated. He thinks that this type of calculation could also be very useful when comparing different funds with each other.

Yes indeed: Before you begin, keep in mind that the value of a mutual fund’s return is not measured through a price, as is the case with stocks and Exchange Traded Funds (ETFs); but with him liquidation value, something known financially as (NAV or Net Asset Value).

Quick question, what is Net Asset Value or NAV?

The net asset value or NAV is the total value of a mutual fund’s holdings minus liabilities. This value is calculated daily once the trading day is closed. Therefore, the NAV will depend on the price of the fund’s investments in the market at the end of the day.

Formula to calculate the annual return of the mutual fund

For calculate the annual return of a mutual fund you will need the annual NAV. So, the first thing to do is subtract the NAV at the end of the calendar, that is, the one corresponding to December 31, from the initial NAV, which is the one for January 1 of the year. Then all that’s left to do is divide the difference by the initial NAV.

Annual Return = (Final NAV – Initial NAV) / Initial NAV

For example, if a fund’s starting NAV is 100 and the ending NAV as of December 31 is 110, the fund’s annual return would be 10%. This calculation would look like this:

Annual return = (110 – 100) / 100

= 10 / 100

Annual return = 0.10 (ie 10%)

Now, to calculate what is the annualized return of that same mutual fund, you will have to add to the calculation the annual interest yield for each year to be computed, for example, three years, five years, ten years, etc; and then divide the total return by the number of years.

Suppose we want to calculate the annualized return of a mutual fund for three years. The annual return for year one is 6%; that of the second, 8%; and that of the third year is 10%. In this case, your calculation would look like this:

Annualized return = (6+8+10) / 3

= (36) / 3

Annualized return = 8%

Remember: The annual return is nothing more than the profit or loss that the mutual fund reported in a specific calendar year, while the annualized return is the average return of that fund over a period of time made up of several years.

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Return on investment of the fund vs. investor’s return on investment

Another important distinction that you should keep in mind before participating in a mutual fund is that the return on your investment as an investor is not the same as the return on investment of the mutual fund.

Are you a little confused? Quiet! You will see it more clearly. The return on your investment is return or ROI (Return On Investment) real, which will be specific to you; while the fund’s return on investment is the profit or loss that the fund reports in one year. These returns can be different and are often confused.

To avoid confusion and shed light on the distinction, we are going to delve a little deeper into the topic. Some investors choose to implement what is known as a systematic investment plan (SIP or Sistematic Investment Plan), which means that these people make regular investments, such as monthly mutual funds. This investment system is also called “dollar cost averaging” (DCA or Dollar Cost Averaging) and usually influences the return that an investor will obtain at the end of the year.

For example, if you use this investment mechanism for a year and the stock market crashes, your ROI will be greater than the fund’s annual return. Why? Because the annual return is calculated by means of the value of the NAV. Therefore, an operation is carried out that includes the whole year, from January 1 to December 31.

But if you make regular investments throughout that year, the question changes, at least for you. If you buy a mutual fund every month and the market crashes, it won’t affect your ROI the same way it does the fund’s annual return because each of your initial NAVs will be lower than the previous one.

On the other hand, if you make a single investment at the beginning of the year, the NAV of the fund -and of your investment- would be high and, possibly, that of the end of the year would be at a much lower level.

What is considered a good annual return from a mutual fund?

Determining whether a mutual fund’s annual return is good will depend on two main factors: the type of fund you’re buying and the historical time you’re reviewing. Our advice? When analyzing how profitable a mutual fund is, choose to calculate the annualized return for at least 10 years, as this will give you a more accurate perspective on the future performance of the fund. You can find this information online or by visiting the credit union or bank of your choice.

For mutual funds that base their investments on stocks, a “good” long-term return would be 8% or 10%. On the other hand, in the case of funds that focus on the purchase and sale of bonds, this percentage would change to be between 4% and 5%.

To obtain detailed and accurate information, we invite you to use a online mutual fund comparison, as this will allow you to see more clearly which is the best mutual fund for you.

Tip: Remember that one of the measures you can use to find out if that mutual fund is a good investment option or if it really exceeds the reference index -such as the S&P 500, which is one of the most common- is by analyzing the information during the last 10 years, both the individual and the historical average.

We end with an example

Since the creation of SPDR Index S&P 500 Index ETF (identified with the acronym SPY) in January 1993, a return of 9.51% was reported. If we speak only in terms of performance, a mutual fund of actions in the long term -10 years- that exceeds this percentage would be considered a good fund. Therefore, a good practice would be to calculate the annualized return of the S&P 500 index over the last 10 years and compare it with the annualized return of the fund in which you want to participate, also calculating it in the same 10-year period.

And what about bond mutual funds? Let’s see it. The reference index that you could use for this comparison would be that of the iShares Core Aggregate Bond ETF. Since September 2003 -and for a period of 10 years- this index reported an annualized return of 4.02%. Therefore, any bond mutual fund that has reported a higher return in that same period of time will be a good option for you.

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