Different Types of Mutual Fund Returns
The most important function of any mutual fund returns is for comparison. To determine the best mutual fund is by comparing its return. The return that a fund disperses over a period of time is just the percentage difference between the starting Net Asset Value and the ending Net Asset Value.
The purpose of calculating returns is to make a comparison between different funds or time periods. This is very complex and one must be careful to avoid making a mistake or one could end up investing in the wrong funds.
Absolute Returns
An Absolute Returns measures how much a mutual fund returns has gained over a given period of time. By looking at the share price over a period of time one can determine the percentage difference which will give you the return over this period of time. Be sure to compare the right fund when utilizing this parameter to compare one fund with another.
If you are analyzing the mutual fund returns of a diversified equity fund (one that invests in different companies of various sectors) make sure to compare it with other diversified equity funds. Don't compare it with a sector fund which invests only in companies of a particular sector and don't compare it with a balanced fund which invests in equity and fixed return instruments.
Benchmark Returns
Benchmark returns compare the earnings of any given fund next to what it should have earned. A Benchmark Return is an index chosen by a fund company in order to serve as a standard for its returns.
In essence, the Benchmark returns are a target whereby any fund is deemed to have done well if it manages to beat the benchmark. Mutual fund returns compared to its benchmark are called its benchmark returns.
Choosing an appropriate time period is the most important factor when measuring or comparing returns. The time period whereby a return should be compared and assessed has to be identical with that fund type it is meant to be invested in. For example, when comparing equity funds you must use three to five year returns although this may not be the case for every other fund.
It is also important to note if a mutual fund returns has a history that is long enough for it to have taken on all kinds of market conditions. The fund manager deserves a pat on the back if a mutual fund returns has succeeded to surpass its benchmark return in the real and dynamic market.
