Mutual Fund Return: Annual Return vs. Annualized Return
By: Kent Thune, updated on November 20, 2021
Text reviewed by: Erika Rashor
Erika Rashor is a globally recognized expert in consumer economics, researcher, and educator. She is a financial therapist and transformational coach with a special interest in helping women learn how to invest.
Annual Return vs. Annualized Return
When researching mutual fund returns, it’s wise to first understand the difference between annual return and annualized return. Annual return is the profit or loss on the initial investment over one year. The annualized return is the average rate of return over multiple years.
Calculating the Annual Return of a Mutual Fund
To better understand the annual return and annualized return of a mutual fund, it’s helpful to know how to calculate each. You should remember that the valuation of a mutual fund is not done by market price, unlike stocks and ETFs. Instead, it’s expressed as net asset value (NAV).
Return on Investment vs. Return of Investment
Another important difference to note when analyzing mutual fund returns, as well as the performance of other securities, is the difference between return on investment and return of investment itself. Return on investment (ROI) is the actual return that an investor realizes. Return of investment is the return of the investment itself. These returns can be different and often cause confusion.
Good Average Annual Return for a Mutual Fund
A good average annual return for a mutual fund depends on two main factors: the type of fund and the historical time frame you are reviewing. When researching mutual funds, it’s wise to review long-term returns, such as the annualized return over 10 years, for a reasonable expectation of future performance.
For equity mutual funds, a long-term “good” return (annualized over 10 years or more) is 8% to 10%. For bond mutual funds, a long-term good return is considered to be 4% to 5%. For more accurate comparisons, you can use a good online mutual fund screening tool. You can then compare any specific return of a mutual fund with its category average or against a benchmark index.
Frequently Asked Questions (FAQs)
How can I invest in mutual funds?
You will need a special type of financial account to invest in mutual funds, typically either a brokerage account or a retirement account. These accounts are different from standard checking or savings accounts, but the process of opening them is similar. Once the account is opened, you just need to place a buy order for the mutual fund you wish to invest in.
How are mutual funds taxed?
The taxes on mutual funds are similar to stock taxes; there are two types of taxes applicable, which are capital gains when selling fund shares and taxes on dividends. The fund manager may incur taxes on the fund by selling shares from the portfolio, but these taxes will be deducted from your distributions, so you do not have to take any additional steps to calculate your tax burden for those activities.
How do mutual funds generate profits?
Mutual funds deduct management fees each year to cover operating costs. You can find out how much the mutual fund charges investors by looking for the total expense ratio, which tells you how much of each dollar invested goes to fund managers.
Correction – July 27, 2022: This article was updated to correct the formula in the three-year annualized return example.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Institute
Corporate Finance. “Annual Return.”
U.S. Securities and Exchange Commission. “Mutual Funds and Exchange-Traded Funds (ETFs) – A Guide for Investors.”
Source: https://www.thebalancemoney.com/good-annual-mutual-fund-return-4767418
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