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Net Asset Value, Fund Distributions, and Total Return

As a mutual fund investor, your earnings are derived from two potential sources: appreciation in the value of your fund shares and fund distributions. Your total return is a combination of these two elements. Once you have determined your fund's total return, you can compare your returns to the market and to mutual funds with similar investment objectives.

Capital Appreciation

Capital appreciation is the difference between what you paid for shares purchased and what you realize when you sell them. It is calculated as the difference in the net asset value (NAV) of your shares. NAV is computed on a regular basis by the fund company and is the price at which shares may be purchased or sold at that time. Money market mutual funds strive to maintain a constant NAV of $1, so they offer no opportunity for capital appreciation.1

Calculating NAV

Periodically, a fund accountant will add up the current market value of all the securities owned by the fund, plus any income or earnings that have not been distributed to shareholders. For example, a fund owns 10 shares of XYZ, which currently is trading for $10 per share. The total value of the fund is $100. From this amount, the fund accountant subtracts the cost of running the fund, which we'll assume is $2. The value of the securities, less management costs, is then divided by the number of shares of the fund that have been sold (we'll assume 20 shares have been sold). In this example, $100 - $2 = $98. Dividing $98 by 20 shares results in a NAV of $4.90 per share. If a fund charges an up-front sales commission (front-end load), the sales charge on purchases is calculated as a percentage of the NAV and added to the purchase price. As the value of the fund's holdings fluctuates, so too does the fund's NAV.

The difference between what you paid for a fund and what it is worth today is your potential capital appreciation (or depreciation, if the NAV has declined). Remember that capital appreciation is only a potential that is not realized unless and until you sell your shares. Once you do sell your shares, capital appreciation may be subject to taxes.

Three Ways to Measure Performance
Change in NAV
A fund's net asset value (NAV) represents the price of one share of the fund. Any change in the value of NAV indicates the performance of the fund.

Yield is the income generated by the fund as a percentage of its NAV.

Total Return
Total return is the gain or loss as a percentage of any fund over time, with the assumption that all distributions during that time have been reinvested. (It does not include any sales commissions.)

Fund Distributions

There are two types of fund distributions: dividends and capital gains. Mutual funds invest in a variety of securities, including stocks, bonds, and/or money market instruments. When these securities pay interest or dividends, the fund is required to pass them along to its shareholders (less a portion of the costs of managing the fund). A bond fund, for example, buys bonds that pay interest, which the fund then passes on to you in the form of a dividend.

Fund distributions also include capital gains realized by the fund when it sells portfolio holdings. The difference between what was paid for a security and what it sells for is a capital gain or loss. Short-term capital gains (on securities held by the fund for 12 months or less) are typically passed on to shareholders as a dividend distribution. Long-term capital gains are reported separately as capital gains distributions. You can calculate a fund's yield by dividing its current NAV by the amount of distributions per share.

Fund Distributions and NAV

Fund distributions affect the NAV of your shares, so they must be taken into account when determining the performance of your investments. When the fund distributes income to shareholders (monthly, quarterly, or annually, depending on the fund), the NAV declines.

Continuing the previous example, assume that a fund holding 10 shares of stock valued at $10 each receives stock dividends of 10 cents a share. When the dividend is paid to the fund, the value of the stock drops to $9.90 per share. The fund now holds stock worth $99 and income of $1.2

The total value of the fund is still $100, and the NAV (again assuming $2 in management fees and 20 shares outstanding) is $4.90. Assume the fund then distributes that $1 in income to fund shareholders. The distribution is equal to five cents per share. The total value of the fund is now $99, and the net asset value of each share is $4.85. Since they received a distribution of $0.05, for a total value of $4.90, shareholders have not lost any money.2

Many mutual fund investors choose to automatically reinvest fund distributions rather than receive them in cash. When distributions are reinvested, the investor receives additional shares (or a fraction of a share) rather than cash. As a result, the total value of the fund investment remains the same even though the NAV declines by the distributed amount.

Total Return

A fund's total return includes appreciation and distributions (dividends and capital gains). Total return is expressed as a percentage of the fund's NAV over a period of time. Let's say that at the close of business on December 31, 2019, the fund's NAV was $10. On December 31, 2020, the fund paid a dividend of $1. At the same time, the closing NAV was $11. The total return for the year would have been $2 ($1 in distributions and $1 change in NAV), or 20% ($2 divided by the $10 NAV at the beginning of the year).2

Mutual fund returns are typically reported year-to-date; past 12 months; as calendar returns for 1-, 3-, 5-, 10-, and 20-year intervals; or for the life of the fund (from date of inception). Since returns tend to average out over time, the longer the period analyzed, the better. It's important to remember that these returns only reflect what the fund has done in the past and are not indicative of the fund's future performance. Also, keep in mind that published returns usually assume that all distributions have been reinvested and that sales commissions (loads) are not included.

A fund's total return may not be the same as your net return. Did you pay a load to buy or sell the fund? Did you incur any other costs, such as wire transfer fees? These fees will reduce your return. Also consider how taxes will affect your net return when making investment decisions.

Net asset value (NAV): The value of each share as calculated at the end of the day.
Net change: Change in NAV.
YTD% return: Year-to-date rate of return, including all distributions.
Total return: Any change in NAV plus other income, usually calculated for the last 1-, 5-, and 10-year periods.
Expense ratio: Annual expenses, including 12b-1 fees.

Tax Treatment of Fund Returns

Fund distributions (other than tax-free income distributed by funds investing in municipal bonds) are generally taxable, as are gains realized through capital appreciation when you sell fund shares. Remember that reinvested distributions are taxable. In 2020, qualifying dividends and long-term capital gains are taxed at a maximum rate of 20%, although an additional 3.8% tax on unearned investment income may also apply.

If you invest through a qualified retirement plan such as a 401(k), individual retirement account, or a variable annuity, you can defer taxes on all investment earnings until the funds are withdrawn from these accounts.

Your financial professional can help you assess the performance of your mutual fund investments and evaluate how short-term changes in NAV affect the long-term potential of your investments. He or she can also help you take taxes into account when choosing and managing your investments.

1An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

2The returns shown are for illustrative purposes only and are not indicative of the returns of any specific investment.

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