How Are Mutual Fund Returns Calculated?

Mutual funds have three main ways of generating returns.

By John Csiszar March 22, 2018 Funds 101

A mutual fund is a shared pool of assets a manager uses to purchase numerous investments. To determine a mutual fund investment’s total return in any given year, you’ll have to include all the money a fund earns, including price movements, income distributions and capital gains payouts.

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

Find Out: ETV vs. Mutual Fund — How to Choose Your Investments

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

About the Author

John Csiszar

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.