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Question about "Total Return" of funds
Old 01-04-2008, 06:12 AM   #1
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Question about "Total Return" of funds

I have a question about the total return of mutual funds. I know this might seem like a very basic question, but it is a little confusing to me.

Suppose I had put $10,000 into a no-load mutual fund on Jan 1, 2007. Also assume I did not add to that investment or withdraw any money from it. Also, I had all the distributions (dividends and capital gains) reinvested back into the fund. Now, to make the math easy, suppose the fund had a total return for 2007 of exactly 10%. Does that mean that the market value of my initial investment on Dec 31 would be $11,000? (10% more than $10,000). It has always been my impression that my value would be $11,000. If not, what other factors are at play that determines the value of my investment?
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Old 01-04-2008, 10:06 AM   #2
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That sounds about right to me. "total return" includes reinvested distributions. The tricky part is that most stock tracking sites will report just the "Net Asset Value" or NAV, which is the price per share and essentially excludes distributions. So the NAV of your fund could have started at 10.00 in January and ended at 10.00 in December, even if it distributed $1000 in gains in December and the value of your holdings is $11000 in December. You would start with 1000 shares in January and end with 1100 shares in December due to distributions. You only care about total value. The NAV is much less relevant.

Dan
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Old 01-04-2008, 10:35 AM   #3
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Quote:
Originally Posted by David1961 View Post
I have a question about the total return of mutual funds. I know this might seem like a very basic question, but it is a little confusing to me.

Suppose I had put $10,000 into a no-load mutual fund on Jan 1, 2007. Also assume I did not add to that investment or withdraw any money from it. Also, I had all the distributions (dividends and capital gains) reinvested back into the fund. Now, to make the math easy, suppose the fund had a total return for 2007 of exactly 10%. Does that mean that the market value of my initial investment on Dec 31 would be $11,000? (10% more than $10,000). It has always been my impression that my value would be $11,000. If not, what other factors are at play that determines the value of my investment?
YES, in your example you would have $11,000.

In the real world the following creates different rates of returns:

1) person deposits money into account
2) person withdraws money from fund (for rebalancing or other)

and these two forces are going independantly of:
3) the mutual fund does not increase 10% jan 2, then stay flat
4) it also does not increase .1% each day or each week. It goes up .5%, then down .75%, then up .5%, then up .5%... each day/week/month
5) The price variations of the fund (the point of items 3 and 4) combined with 1 and 2 change performance.

Example- Most of my funds were in 3-5% returns for 2007. My IRR was 7%. I actually did better than my funds. This is because
a) I sold off some in June as part of a rebalance
b) my Roth contributions are Jan-August. No new money is put in in Sept-Dec to a portion of my portfolio.
c) My wife's 401k kicked butt (10% IRR)- she holds some company stock whichs adds some risk and volatility.
d) obviosuly the dates of 401k purchases (1st and 15th of months) did OK.
e) Portfolio is 98% equity-2% bonds as of Jan 1.
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Old 01-04-2008, 11:29 AM   #4
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yahoo gives YTD total return numbers. Their graphs are just NAV though.

I think the YTD total return numbers are based on reinvesting any divs. They also have a table of 'historical prices' and they 'adjust' for dividends - but I think that just means the divs were paid out, so they subtract from the cost basis (looking backward), but I do not think it accounts for re-investing the divs.

A seemingly basic question is not so simple, is it?

-ERD50
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Old 01-04-2008, 02:12 PM   #5
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Suppose I had put $10,000 into a no-load mutual fund on Jan 1, 2007. Also assume I did not add to that investment or withdraw any money from it. Also, I had all the distributions (dividends and capital gains) reinvested back into the fund. Now, to make the math easy, suppose the fund had a total return for 2007 of exactly 10%. Does that mean that the market value of my initial investment on Dec 31 would be $11,000? (10% more than $10,000).
Yes
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