What Is Total Return?
There are many ways to judge the performance of your investments. Unfortunately, many people simply look at the bottom line. Did the investment go up, did it go down, and if so, by how much? But there's much more to performance than just a return number. For a more complete picture, you need to know the components that make up an investment's total return. For mutual fund investors, total return is the full amount that your investment earns over a specific period of time. Total return takes into account the three ways you may earn money with mutual funds: dividends, capital gains distributions, and capital appreciation (an increase in net asset value or NAV).
|Dividends + Capital Gains Distributions|
|+/–||Change in NAV|
Components of a Funds Total Return
The components of the total return of a stock fund versus a bond fund can be dramatically different.
Stock Fund Total Return
With thousands of stock funds available today, making generalizations about total return can be difficult. For example, the majority of aggressive growth funds do not invest in stocks that pay dividends, whereas growth and income funds often invest in stocks that pay dividends. As such, a stock fund's total return may include all three components—capital appreciation, capital gains distributions, and dividends. If you look at stock funds as a whole, the majority of total return comes from capital appreciation, followed by capital gains distributions, and then by dividends.¹
Bond Fund Total Return
Many bond fund investors assume that total return is derived entirely from dividend income. On the whole, the majority of total return does come from dividends. However, certain types of bond funds generate a portion of total return from appreciation. For example, when interest rates fall, the prices of bonds rise, or, in other words, appreciate. Bond funds that hold longer-term securities may experience even greater capital appreciation as the average maturity is longer, and, therefore, more sensitive to changes in interest rates. High-yield bond funds also generate capital appreciation when a corporate bond's investment rating is upgraded.
Total Return and Fund Performance
There are many ways to calculate fund performance, and total return plays a part in each method.
Average Annual Total Returns
Analyzing the performance of mutual funds should include looking at their average annual total returns for different periods of time. Comparing their returns to their benchmark will show how the fund has performed relative to an index. When looking at average annual total returns remember that:
- The numbers almost always reflect reinvestment of dividends and capital gains distributions.
- Average annual total returns may or may not include the effect of sales charges. However, this information must be disclosed along with the return numbers.
Cumulative total returns show how much a fund has earned over a specific stretch of time. Therefore, be sure to note the fund's inception date and also review its average annual total return numbers.
Comparing a fund's performance from one year to the next can be eye opening. The wider the variation from year to year, the more volatile the fund.
How Sales Charges Affect Total Returns
Total returns may be reported in two different ways:
- At NAV, without any adjustment for sales charges.
- Adjusted to include the maximum sales charge for the share class and period shown.
When total returns are shown at the public offering price, they include the maximum up-front sales charge. Total returns that reflect a contingent deferred sales charge (CDSC), show the effect of the maximum applicable back-end sales charge. If no sale charges apply to your purchases or sales, you should look for total returns at NAV. But keep in mind, security values, distributions, fees, and expenses all affect NAV.
Tracking a Fund's Total Return
Total return information is available from a number of sources:
- Your investment professional.
- The mutual fund provider.
- The fund's prospectus and annual report.
- Daily newspapers and other financial publications.
- Independent mutual fund performance monitors.
When you review total return data, be sure to also review the factors used in calculating performance. This will help you make more meaningful comparisons among different funds
- Neither New York Life Investment Management LLC nor its representatives provide legal, tax, or accounting advice—please contact your own advisors.