Back to top

Mutual fund profitability

In the previous article about investment funds, we told readers about the concept, structure and activities of such funds. In this article, especially for those who are important not only theoretical concepts, but also their practical application, we consider the main approaches to choosing a fund and evaluating its activities, with a view to future investment.

What you should pay attention to when choosing a mutual fund

When choosing an investment fund, investors tend to focus their attention on the historical results of the mutual fund and often forget about other important characteristics, such as the structure of the investment portfolio or the amount of equity capital. Nevertheless, although the return on investment is certainly an important factor, we suggest starting the selection of a fund by considering the basics of investment. In the end, strong, consistent investment performance is what gives the best results.

When investing in mutual funds, it is especially important to consider all the components of high-quality investments, and not just their effectiveness. Naturally, various financial media constantly bombard us with “hot offers”, and personal finance magazines are filled with fascinating headlines about where to invest and how much the investor will earn on this, if they invest already, without delay. And this is a fairly common habit of the investment community to focus on short-term investments to generate large and immediate income. However, the majority forgets that high returns in a relatively short period of time are associated with a high risk of losing their investments.

Too many mutual funds are successful in a very short period of time. Record books are full of superstars that disappear from year to year. Therefore, immediately remember two key points when assessing the effectiveness of any fund:

  1. Highest performance is the result of favorable performance.
  2. To rely on performance indicators, they must be established over a relatively long period of time.

Main indicators of mutual fund

Total revenue

The effectiveness of a mutual fund is always expressed in the form of its total return, which is the sum of changes in the value of the fund’s net assets, its dividends and the distribution of capital gains between investors over a certain period of time.

Typically, the time periods used by investment research analysts are year, 3 years, 5, and 10 years. The most relevant for investors are five and ten-year periods, and the latest timeframe most objectively reflects the professionalism and abilities of the investment manager.

In addition, it should be borne in mind that the indicators of total income are calculated and expressed net of fund expenses. Often, in the advertising of funds, as well as in the financial press, the effectiveness of funds is given, without deducting basic expenses, to display more attractive indicators.

Market conditions

The true potential of the fund’s activities should be assessed in the context of the market environment prevailing during the various periods in question. If we analyze the total total income for one year (2018), three years (from 2015 to 2018), five years (from 2013 to 2018) and 10 years (from 2008 to 2018), we will get completely different results.

For example, as of May 2019, when reviewing the three-year UIF activity period, we noted one highly profitable year (2017) and two fairly good years (2016 and 20128), each of which gives a positive assessment of the total return on the fund. However, when analyzing the five-year period, we note two unprofitable years (2014 and 2015) which, in sum with the subsequent successful years, are leveled and the average value of efficiency is leveled.

It is obvious that the consideration of the 10-year period of the fund’s activity will most likely cover a set of different market conditions and show a more reliable long-term indicator of the potential profitability of the fund.

Annual and total actual yield

Since the basic unit of time for evaluating the effectiveness of a mutual fund is one financial year, when analyzing investors pay attention to the annual profitability indicators. For clarity, suppose that the average annual five-year return on fund X was 12%. This does not mean that X provided actual annual income of 12% for each of the five years selected, and this indicator is the average annual income.

Despite its usefulness as a general indicator of fund performance, a prudent investor will want to see the actual or average annual yield of the mutual fund. Quality management and investment is always reflected in fairly stable annual indicators, and not in sharp ups and downs. In other words, a smooth ride on a merry-go-round would be preferable to the thrill of a rollercoaster ride.

To better understand this point, let’s go back to the five-year annual yield of the X and Y Funds of 12%. It would be a fairly reliable indicator of efficiency if X had the following annual income results: + 9%, + 13%, + 10%, + 15% and + 13%. On the other hand, the five-year yield Y has the following annual indicators of income: + 58%, + 9%, + 3%, -2% and 8%. Obviously, despite the same final result, the investor should pay attention to the first fund, as a stable result shows the professionalism and reliability of the fund capital management.

New funds and managers without track record

If you do not have special circumstances, simply avoid mutual funds with performance indicators of less than three years. New managers and funds need time to show themselves. There are dozens of good funds with years of experience and managers who have proven themselves well.

Therefore, when it comes to your hard-earned dollars, invest in reliable and proven funds.

Execution Disclaimer

In the investment business, it is often repeated that the data on the company’s profitability represent the results of previous years, and are not a guarantee of future results.

Of course, the real purpose of this statement is to protect the liability of suppliers of investment products, and not to provide advice to investors.

Despite this, a competent investor should work with past performance, and not guessing on cards or asking for advice from psychics. The real problem here is the phrase “no guarantee”, which should warn investors about the simple fact that future investment performance depends on many variables.


Comparative analysis is one of the most important aspects of the overall profitability of a mutual investment fund. Fund performance indicators are meaningful only if they are compared with relevant benchmarks or benchmarks. In the financial sector, there are dozens of indices by which analysts measure the effectiveness of any given investment.

Examples of well-known and widely used market indices include:

  • Standard & Poor’s 500 Index: includes 500, mainly large US companies, representing a number of industries and sectors of the US economy. The S & P 500 is typically used as a general reference point for the stock market, as well as for large-capitalized mutual funds.
  • DJ Wilshire 5000 Index: includes over 6,700 US companies of all sizes and is considered the broadest dimension in the US stock market. Wilshire 5000 is used as a guideline for the US stock market and all mutual funds.
  • International EAFE Morgan Stanley Capital Index: The widest international stock standard MSCI EAFE measures the dynamics of stocks in Europe, Australia and the Far East. There are additional MSCI indices for other regions, individual countries and overseas market segments.

Comparison of Funds

In addition to formalized benchmarks, mutual funds are also compared with their peers or peer groups and relevant categories of funds. For example, it is common for investment research to compare a fund of shares with an average cost of capital with funds similar in nature (to peers or a group of similar funds), as well as an index that is used for the category of shares with the average cost of capital in general.

The quality of investments in the mutual fund’s total income is confirmed by relatively stable positive indicators compared to its peers, the category headliner and the corresponding index over five and ten years periods.

For example, if the X-fund’s total annual income was 9.5% and the S & P 500 index showed 8.2%, the comparison would be expressed as + 1.3% for the period. This indicator shows that fund X performance is above the S & P 500 index.

By examining the overall performance of the fund in performance reviews, especially in the five-year and 10-year periods, we can easily determine how the fund works compared to its corresponding benchmarks. The positive difference in performance between the fund and its benchmarks is a very profitable quality of investment.

Fund rating as an indicator of its reliability

The official ratings of various rating agencies allow you to understand the overall situation in a particular fund and according to various criteria and select from them those that are suitable for your personal investment goals.

There are different coverage and specific ratings. Investment funds are assessed by most financial rating agencies, ranging from global companies such as Moodys and Standard & Poor’s (S & P) to local companies that analyze local markets.

Each agency has its own rating scale, which has letter designations, as a rule, from “AAA” to “D”. In addition to the letter categories can be added modifiers “+” and “-” or the numbers 1, 2 and 3, if you want to show intermediate values.

  • AAA maximum reliability;
  • AA very high reliability;
  • A high reliability;
  • BBB sufficient reliability;
  • BB is average reliability;
  • B satisfactory reliability;
  • CC low reliability;
  • C low reliability;
  • D category “default”.

Assigning a rating is often a paid service, so not every fund will conduct it. After the conclusion of the contract with the selected rating agency, the company must provide the company analysts with all the necessary information about their activities.

After that, a rating meeting is organized with representatives of the management of the credit organization. Based on the evaluation of all the data obtained, the rating committee makes a decision on assigning a rating. Assigning a rating is a positive thing for the company and certainly affects its reputation.

Theory in practice

When choosing a fund for investing directly (in real life, not on paper), factors such as psychological pressure and greed also come into play. In particular, the irrational behavior of investors can manifest itself after any interactions with representatives of the mutual fund or other similar organizations. Most often, professional sellers work in such companies at the level of attracting and supporting the client, with the goal of selling their goods to the client at any price.

For a competent consultant, it will not be difficult to wrest from the context the indicators he needs in order to present the foundation in the best light. Therefore, when choosing an object for investment, be it a mutual fund or other types of assets, always rely on your decisions and remember that only you are responsible for your money.

In assessing future income from investing in mutual funds, we cannot predict the value of returns, even for a short period of time. Therefore, it is necessary to take into account the average value of the fund’s return over the previous periods. Consider the option of calculating the yield on the example of fund X, which we considered above.

In this example, the average yield of the fund over 5 years was 12% per annum. For convenience, we take the initial investment amount of $ 1000. Now that we have decided on the amount, we will calculate the potential income for the first year of investment in the mutual fund.

The first thing that negatively affects our profit is the fund’s commissions. This question needs to be studied in detail beforehand. First of all, find out about the fees charged by the management company from their shareholders. There are two main ones:

  • Premium commission, which is charged to the shareholder when purchasing shares in the fund. As a rule, it depends on the amount of the share (the greater the contribution, the lower the commission). It is charged immediately upon purchase, and can reach 1.5% of the amount of the share.
  • Discount the commission charged by the Criminal Code at the redemption of a share. The size of the discount depends on the term of the deposit; the discount can be up to 3% of the value of the share.

These commissions are directly detrimental, as they directly reduce your potential income.

Also, the fund may charge an additional fee as a remuneration of the managing manager, cover the costs associated with the transfer or storage of funds, etc. For our example, we take a surcharge of 1% discount amount of 2%.

With the help of simple calculations, we find 12% of our investment amount of $ 1000, which is $ 120. This will be our total revenue. Now, we need to deduct the fund’s commission from this amount: the premium that the investor has paid when he bought the share is $ 10, and the discount totaled at $ 20. Total profit was $ 90.

Now we need to adjust the result obtained to the rate of inflation, in order to estimate the real profit. Conventionally, for our example, take the inflation rate at 4% per year. Based on this, we understand that our initial investment amount of $ 1,000 for the current year lost $ 40 from its real value. Based on this, we can see that the real net return on investment was 5%.

Note that our example is conditional, and in reality other variables may be added to such a calculation (for example, a difference in rates or a bank commission).


As we have already described in the previous article, investment in mutual funds has its both positive and negative sides. Without a doubt, when buying a share in one fund, the investor takes on the significant risk associated with market risks and fund management.

In order to reduce risks, we strongly recommend to evenly distribute investments between assets of different type and degree of risk. Remember that the proper diversification of the investment portfolio will not only help you make a profit, but also reduce the chance of losing money in the event of an unfavorable development of events in the market.

1 Star2 Stars3 Stars4 Stars5 Stars (7 votes ≈ 4.86 out of 5)