How to calculate real returns of mutual funds

Your Funds

Dollars & Sense

March 19, 2000|By CHARLES JAFFE

By most accounts, one of my favorite mutual funds had a bad year in 1999.

In that fund, however, I had a worse year.

It's a phenomenon that happens to a lot of investors, although many people don't actually realize it.

That being the case -- and with your 1999 year-end fund paperwork still reasonably handy -- you may want to evaluate your fund portfolio more on the basis of your performance than on how the fund says it did for the year.

In my case, for example, the fund that grabbed my attention for poor performance was up about 5 percent, but my account gained 3.5 percent.

The difference reflects my behavior as an investor, specifically the additional investments I made during the year and the timing of those transactions. (It could have been equally affected by withdrawals, though I did not make any.)

The spread between a fund's performance and your actual results in the fund can be huge, particularly if you buy a hot fund that cools down soon thereafter.

This is how investors wind up with a portfolio of "good funds," but without the good results to show for it.

For example, by the middle of July my fund (which I have no intention of selling because it has been a solid long-term performer) was up more than 17 percent. Any money invested at that high point -- and I make automatic monthly deposits -- lost more than 10 percent through the end of the year. In fact, almost everything invested in this fund after the start of May wound up the year with a loss.

So, while most of my money was in the fund for the whole year and finished up 5 percent, my new investments showed a loss.

That's why, unless you hold a fund all year without making a move in it, your real return is as individual as you are.

With your year-end account statements barely filed away or still out in order to help calculate your taxes -- and I'm giving you the benefit of the doubt in how you handle your fund paperwork here -- it's easy to figure out how you really did in a fund compared with how the fund did for the year.

Some fund companies do this for you and give you a personalized portfolio accounting, but most don't. Financial advisers should give you this kind of data when they review annual performance (although many do not).

That said, here's how to estimate your time-weighted returns, the measure of how you really did in the fund.

Start with your last statement of the year, which details all of your transactions for the 12-month period. (Take out statements for all of your funds, add the balance/transaction amounts together, and you can estimate the time-weighted return of your entire portfolio.)

From the statement, get the following information:

The balance in your account (or portfolio) at the start of the year. (From now on, we'll call this your "starting balance.")

The value of that account -- plus any dividends, capital gains or interest that you took in cash instead of reinvesting -- at year's end. (This is your "ending balance.")

The total value of additional investments, minus any withdrawals, made during the year.

Next, pull out your calculator and do the following:

Step 1. Calculate your "average monthly balance." To do this, subtract your starting balance from your ending balance. Cut the result in half, then add back the amount of your starting balance. The result is the average amount you had in the fund during any month of the year.

Step 2. Calculate your "total gain."

Add your starting balance to your additional investments. Subtract the result from your ending balance, and you have the amount of your gain that is not attributable to growth in the fund during the year.

Step 3. Check out your real return from the fund.

Divide your total gain by your average monthly balance, and multiply the result by 100.

The result is your total percentage gain for the year -- on existing and new investments -- before taxes.

It's not perfect. If your new investments all were either early or late in the year, it would skew the numbers. If you invest regularly, however, the results should be accurate.

What's more, the ups and downs should even out for regular investors over time (in the same fund last year, all of my money was strongly positive). But if you find you always buy in at highs and ride out the downturns, consider changing the way you pick funds, or the way you decide when the time is right to throw more money at a particular fund.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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