Tracking Fund Performance

Whether a mutual fund aims for current income, long-term growth, or a combination of the two, there are three basic ways to track its performance — and judge whether or not it is profitable. You can evaluate a fund by:

Following changes in its share price, or net asset value (NAV)
Figuring yield
Calculating total return

You can compare a fund's performance to similar funds offered by different companies, to the appropriate benchmark for the fund, or you can evaluate a fund in relation to other ways you could have invested the money — stocks or bonds, for example.

Because return is figured differently for each type of investment, there isn't a simple formula for comparing funds to individual securities.

Value of fund Number of shares	=	NAV

for example

$52,500,000 3,500,000	=	$15

A stock fund's NAV is the dollar value of one share of the fund's stock. It's figured by dividing the current value of the fund by the number of its existing shares. A fund's NAV increases when the value of its holdings increases and the number of shares remains stable. It may also increase if the value remains fairly constant but the number of shares decreases.

For example, if a stock fund's NAV was $9 a year ago and is $15 today, the value has increased about 66% per share, and you could sell at a profit.

Distribution per share Price per share	=	Yield (%)

for example

$.58 $10.00	=	5.8%

Yield measures the amount of income a fund provides as a percentage of its NAV. A long-term bond fund with a NAV of $10 paying a 58-cent income distribution per share provides a 5.8% yield. You can compare the yield on a mutual fund with the current yield on a comparable investment to decide which is providing a higher rate of income. Bond fund performance, for example, is often tracked in relation to individual bonds, or bond indexes.

Change in value + distributions Cost of initial investment	=	Percentage return

for example

$825 $8,000	=	10.3%

A fund's total return is the annual amount your mutual fund changes in value plus distributions the fund pays on that investment. It's typically reported as percentage return, figured by dividing the dollar value of the total return by the amount of the initial investment.

For example, an $8,000 investment with a one-year total return of $825 ($600 increase in value plus $225 in reinvested distributions) has an annual percentage return of 10.3%.

In contrast, if the fund's NAV dropped, you might have a loss, or negative return for the year even if you were paid a distribution.

WATCHING RETURN
The most accurate measure of a mutual fund's past and current performance is its total return, or the increase in value plus reinvested distributions. Total return is reported for several time periods, typically as long as the fund has been in operation. When the figure is for periods longer than a year, the number is annualized, or converted to an annual figure by dividing the total return over the period by the number of years.

While there's no guarantee that a fund's future performance will equal its current or past record, many experts point to a strong performance history over time as one basis on which to make an investment decision.

Among the key factors that influence total return are the direction of the overall market or markets in which the fund is invested, the performance of the fund's portfolio of investments, and the fund's fees and expenses.

KEEPING SCORE
Mutual fund research companies, including Standard & Poor's, Lipper Inc., and Morningstar, Inc., track individual funds and categories of funds, rating them using several criteria including total return since the beginning of the year and annualized returns for three, five, and sometimes ten years. As part of their evaluation, they report on each fund's expense ratio, or the percentage of the assets that go to pay management and other fees. Those costs have a direct effect on overall performance. The higher the ratio, the better the fund must do to equal the results of a similar fund with lower expenses.

Research companies also report on each fund's assets, or the amount it is investing. The size of a fund can have a major impact on its performance record, since the larger a fund grows, the more difficult it may be to trade enough shares rapidly enough to take advantage of changes in the marketplace.

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