Average return on mutual funds

Most instances when we see mutual funds ads they usually quote very amazing rate of return on a yearly basis. In most instances, the first though is usually, that this fund is performing very good and we hurriedly invest in it. After maybe three years, when you consider it performance it has dipped by a certain margin. In five years, this fund has dipped even by a far margin. This means that it is better to watch carefully a fund’s performance over different number of years so as to get the right clue on the return rate we should expect.

During the year, which ended in 2014, funds had an excellent performance, which was at 53%. A keen consideration of the average annual return rate for the past three years was 20%. For most people the question will be what happened that the funds dropped by this margin. Simple calculations can show this came to be. Funds made an average of 3.5% in the last two years of the three-year period. (53% + 3.5%+3.5%)/3=20 this is not only the average for the three years but it is very likely that the funds lost money over this period.

When we take a close look at how the funds performed over five years, the rate of return gets worse. Since the first year, we had a return of 53% and the following successive years we had a return rate of 3.5% in the fourth and the fifth year something happened to bring this average to alow of 11%. Simple calculations can reveal how this happened. (53% + 3.5%+3.5%-2.5%-2.5%)/5. This makes the funds’ performance to look unattractive

It is though important to note that this calculation has used a simplicity manner of explaining all this and has also made some assumptions regarding this. This calculation does not include compound interest. It is also important to note that a fund, which has a tendency of losing money over few years, has the possibility of bumping the average significance with one or two strong years.

Knowing a fund performance is not entirely, what you need to calculate the rate of return. When a fund is judged by set benchmark, index new information, which might have been neglected, become evident. If the benchmark index returned 75% for approximately one year, about 53% of this fund does not look so good. If the index delivered 25% , 5% or 5% for one , three and five years respectively the fund.

It is worth to note that different funds perform differently. Some have good rates of return while other are characterized by loss of money which results in lower rates of return though the above show rate of return for different years is the average across different funds.