How to Decipher Mutual Fund Returns

A guide to the many ways these popular investments measure their performance.

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PAST PERFORMANCE MAY BE little guarantee of future results, but when we assess investments, especially mutual funds, past performance is an informative measure. But it's not the only one. The trick is to understand what you're looking at when you scrutinize performance, and it's come to our attention that some investors are misreading key facets of mutual fund returns.

To set the record straight, we've put together a primer based on questions we've received from readers about fund returns. Knowledge is power, after all, and a better understanding will help you make smarter investment decisions. All returns and data are through May 6.

What's a total return? A fund's total return, as it appears in our magazine's fund tables, on the fund's website or in its prospectus, is the rate of return over a specified period. According to rules set by the Securities & Exchange Commission, the return is adjusted for any fees or expenses charged to investors, including annual fees and sales charges (loads) on shares purchased. So no matter how high the fees, they've already been accounted for in the returns.

That's why it's important to make sure you're eyeing the right share class of any given fund before you start digging into its returns. Some fund companies have multiple classes, say Class A or C or I. Each one may charge a different expense ratio and sales load, and that impacts returns. "A lot of people don't understand that different share classes of the same fund will have different returns because the fees can vary widely," says Lauren Gadkowski Lindsay, a certified financial planner in Hyannis, Mass.