How are a mutual fund's annual returns calculated?

I've invested in a mutual fund was going over the statement, and was just curious how they arrive at an average annual return for the life of the fund. I know you do NOT simply use an arithmetic average of each year's return.

Do they look at what you'd have at the end of the time period and then annualize a return based on that? I'm really curious how it is calculated.

It's a geometric average to account for the compounding effect. The general form is:

[1+(Current Capital - Original Capital) / Original Capital)]^(n periods per year / number of periods) -1

Which is kind of a mess. Let me give an example:

NAV at purchase: $10
Current NAV: $12
Life of fund: 30 months

Average Annual Return:
[1+(12-10/10)]^(12/30)-1
=[1.2^(12/30)]-1
= 0.757
= 7.57%

Tags

　　Investment Advice 　　Investment Account 　　Invest Money 　　Invest in Gold 　　Invest Fund 　　Income Fund 　　HYIP 　　High Yield

Related information

What should i do about my mutual fund in this bad market?

Hold on to it. The market will always have fluctuations and corrections - you sell when high, not low.

...

Plan to invest in stocks/mutual funds in ~ 1 year. Suggestions of good books for starting out/research/study?

Well...you've listed several perfectly fine books...I always recommend the "Millionaire Next Door" to clients "starting out"...but, honestly...start out with a reputable ad...

Is investing in TATA SIP Funds (mutual fund) a beneficial option?

may be

...

Suppose if I have invested in SIP in Mutual Fund what is tax treatment for it?

Only ELSS funds qualify for tax deduction u/s 80c good luck pnkmurthy@yahoo.com

...

Im invested in an ETF fund. If one of the stocks in my fund splits, how does it affect my ETF?

if all other changes are ignored, then the split of a stock will have ZERO affect on the value or the number of shares you own in the ETF. A simple example, if it is a 2 for 1 split, then the numb...

I have $5k what should i invest it on ?

You can get a fund-of-funds and then your money will be diversified across many different funds. These mutual funds take your money and place it into several underlying funds. It makes investing ...

I invest in 4 Janus Funds, do people still not trust them?

Hi, Hey! You have done well. You have a good split between domestic equities and foreign stocks, but I think you should look into some small cap growth and small cap equity mutual funds. ...

Which is better to invest in if your a beginner in investing? Stock or Mutual Funds?

Mutual funds in that they are already diversified and they are professionally managed.

...