Measuring fund Returns

Are you getting what you're paying for?

As an investor, “knowing what you don’t know” can be critical. But even if you’re diligent about researching your mutual fund investments, it can be difficult to find the answers you’re looking for. A recent report from the U.S. Government Accountability Office summed it up: “The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options.” (The full report, GAO-07-21, can be found on www.gao.gov.)

To start, it’s important to have a handle on how much simply making an investment is going to cost. After all, when fees are deducted it means that money is no longer working for you, and the value that those funds could provide due to compounding will be lost.
Unfortunately, investors who rely upon their employer’s 401(k) plans aren’t in a position to do much about high fees. However, it’s still important to scrutinize, as best you can, what you’re paying for with each fund.

The other half of the equation is to understand what you’re really getting for your hard-earned dollars. To help matters, Morningstar Inc. recently rolled out an additional metric that provides a clearer picture of a mutual fund’s performance. Called “investor returns” or “asset-weighted returns,” this figure gives more weight to the performance of a mutual fund when there’s more money moving into its coffers and its assets are sizable. By taking into account the flow of assets in and out of a mutual fund, the goal is to provide a better picture of the typical investor experience.

Investor returns differ from total returns, which reflect a fund’s performance over a specified time period and presume a buy-and-hold strategy. To take a look at what returns a fund has posted for its investors, after you input a fund on www.morningstar.com, click on “Total Returns” on the left side of the screen, then at the top of the returns screen click on the tab for “Investor Returns.” You may be surprised by the gap between total and investor returns.

The bigger picture is that investor returns are tied to volatility. While no single number should be the determinant in your investment decisions, Morningstar’s analysis concluded that “a fund’s volatility appears to be a key determinant in whether its investor returns are good or bad.” So you may want to start taking a look at investor returns as part of the research for your mutual fund purchase decisions.

Here are the basic metrics to look at:
Sales charge: If you purchase a fund using a broker, you may have to pay a sales charge, known as a front-end load. So if a fund has a 5.50% load, on a $10,000 investment you would pay $550 in commissions, and $9,450 would be placed in the fund. Depending on the share class of the fund, sometimes investors will pay the sales charge when they sell the fund. The front-end or deferred load percentages can be found by viewing a fund’s profile on Websites such as

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