The math behind the calculation is similar to that used in computing stock market returns, but there are additional variables for evaluating the return on your mutual fund investment.
Mutual Fund Terminology
To understand how to calculate the total return on investment for a mutual fund, you’ll have to know some basic terminology. Net asset value refers to the total value of the investments in a mutual fund divided by the number of outstanding shares. So, if a fund has $100 million in assets and 2.5 million outstanding shares, the NAV per share is $40.
Since a mutual fund is a pass-through entity, essentially all earnings generated by the investments a fund owns must be paid out to shareholders. Income distributions are often paid monthly or quarterly. Capital gains, which are generated when a fund manager sells an investment at a profit, are often paid out annually.
Related: Best Mutual Funds for 2019
Mutual Fund Return Components
The best mutual funds have underlying investments that go up in value. This movement is reflected in the fund’s NAV. For example, if your fund’s NAV moves from $10 per share to $11 per share, you’ve generated a $1 per share profit, for a 10 percent return. This gain is unrealized — you don’t have to pay taxes on it until you sell the shares at a profit. When a fund’s income and capital gains distributions are added to this NAV movement, you have the total return of the mutual fund.
Mutual Fund Return on Investment Calculation
To calculate a mutual fund’s total return, add the fund’s distributions to the difference in the fund’s NAV over the course of the year:
(Final NAV + Income Distributions + Capital Gains Distributions – Original NAV) / (Original NAV) x 100
Here are some sample values so you can perform an ROI calculation:
- Final NAV: $12 per share
- Income Distributions: $0.50 per share
- Capital Gains Distributions: $0.75 per share
- Original NAV: $10 per share
Apply the formula:
($12 + $0.50 + $0.75 – $10) / ($10) x 100
= ($13.25 – $10) / ($10) x 100
= $3.25 / ($10) x 100
= 32.5 percent total return
Difference From Stock Return Calculation
Stocks don’t technically have a NAV, although a stock’s share price is similar in concept. Since stocks are not funds, they don’t pay out capital gains distributions like funds. Thus, the formula is slightly different when calculating stock returns:
Total Stock Return = (Final Stock Price – Original Stock Price) + Dividends / Original Stock Price
Use these assumptions for the calculation:
- Final Stock Price: $42
- Original Stock Price: $35
- Dividends: $1 per share
Using the formula, here’s how you’d calculate a stock’s total return:
($42 – $35) + $1 / $35
= $8 / $35
= 22.857 percent total return
Learn More: The Difference Between Stocks and Mutual Funds