What is a Good Annual Return for a Mutual Fund?

Thursday, Jul 19 2018 by

The famous scientist Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. In investing terms, it also called compound interest. But, unfortunately, many new investors lose money because they don’t understand how compounding works. The result, they chase after the unrealistic rate of return on their investments, whether they invested in the stock market, mutual funds, commodity market, real-estate or any other asset class.
It is because investors don’t care about the “Rupee” or “Dollar” per se, they only care about how many things they can purchase. So, whether it is about the “Mutual Fund” or some other asset class. They only care about a goof annual return on their investments. In here we will discuss an annual return for a mutual fund since mutual fund investors are long-term investors who seek consistent growth with less volatility.
If we take a look at the historical data, mutual funds tend to underperform compared to the market average during bull markets and outperform during bear markets. Since the risk tolerance of long-term investors is quite lower than the short-term investors and traders, they are more concerned with maximizing risk in their MF investments than they with maximizing gains.
As to what adds up a good average annual return for a mutual fund, “good” is actually defined by the individual investor’s expectations and desired level of return. Some investors satisfied with the return that is slightly above the average return of the overall market and consider a good annual return if it meets that goal. However, the investors who are seeking higher returns would be disappointed with that level of return.
So, in order to understand the mutual fund’s return over time, it is important to understand the difference between annual return and annualized return.
Annual Return
Annual return is the percentage change in an investment over a one-year period. Annual return helps investors to analyze the performance over any given year of a company or investment.
All it takes to determine the initial price of the investment at the starting period followed the price of the investment at the end of the one-year period. Their difference helps in determine investment’s change in price over time.
Annualized Return
In contrast, the annualized return can be used in a variety of ways to evaluate performance over time. The calculation for the annualized return is no different than annual return but instead of calculating for a one-year period, it is based on the full investment holding period, regardless of whether it’s shorter or longer than a one-year period.
Final Thoughts: -
In a nutshell, investors must understand their goals for the investment over the time period. Knowing the expected return help investors in checking the performance of mutual fund’s schemes over specific time periods and determine whether or not the investment is performing according to the objectives.


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Do you like this Post?
1 thumb up
5 thumbs down
Share this post with friends

1 Post on this Thread show/hide all

JohnWigg 19th Jul '18 1 of 1

A puzzling article. I must have misunderstood "annualised"!

An example: a UK REIT, AEW Long Lease REIT announced that its NAV had risen by 4.56% over the past quarter. I make that 19.5% "annualised" [1.0456^4) which doesn't seem to fit the author's definition here.
Incidentally, the AEWL example (from yesterday) made me suspicious - do ordinary commercial property companies see that kind of rise in today's markets? (Gearing level isn't big enough in this case.)

| Link | Share

What's your view on this thread? Log In to Comment Now

You can track all @StockoChat comments via Twitter

Stock Picking Tutorial Centre

Related Content
How I build an HYP
How I build an HYP
Income Investing Tue 10:12am

What to do with cash in an isa
What to do with cash in an isa
Behavioural Finance Mon 9:14pm

Getting started with ETFs
Getting started with ETFs
Funds and ETFs 5th Oct '17

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis