Saturday, November 15, 2008

Measures of performance of Mutual Fund

A prudent investor would be interested in measuring the performance of his investments on a time to time basis. However, the method he selects to do so can have an impact have an impact on them. For this, the investor need to be very careful of the approach he adopts to measure the performance of his investments.

For measuring simple returns, the following methods can form a basis:


NAV or the net asset value is generally defined as the fund's total assets divided by the number of shares outstanding. It is the total market value of the securities divided by the total number of units of the scheme. Though, it is most widely used method by the investors to measure the returns on their investments, it can be misleading

Relying on changes in NAV can understate the actual returns because NAV doesn't tell whether the fund has paid any dividend or distributed any capital gains over the period being measured. Moreover, a capital gains payment would actually reduce the NAV because the fund pays out money from what is counted as the part of the value of its portfolio.

· Total Returns

Total returns can be counted as one of the best measures as it denotes the total return generated by the initial investment for the time the money is invested in the fund. It includes share appreciation as well as dividends, interest and capital gains distributions from the securities the fund sell at profit. Thus, it includes dividend and capital gains distributions along with any changes in the fund's share price.

In other words, total returns, expressed as a percentage of an initial investment in a fund, represents the change in that investment's value over a given period, assuming any distributions were reinvested in the fund.

· Yield

Yield is the measure of net income earned by the securities in the fund's portfolio during a specified period. It is expressed as a percentage of the fund's NAV. Yield does not include any change in the investment's value over a given period.

Fixing on yield can also be misleading. Yields express dividends or interest as a percentage of the price but do not reflect how the shares themselves may have risen or fallen in value.


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