Average Annual Return

By: EconomyWatch   Date: 23 November 2010

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Average Annual Return refers to the return of a mutual fund which is measured as an average after deducting the mutual fund's operating Expense Ratio. These expenses do not contain the Sales Charges of the mutual fund. In many cases of Mutual Fund Investment, the investors are required to pay Transaction Brokerage Commissions for their Investment Portfolio. But, these commissions are not counted for at the time calculating the Average Annual Return.

This Average Annual Return is actually a figure which is represented in percentage and is used to reveal a particular mutual fund's historical return. Generally, Average Annual Return of a mutual fund shows the average returns of the fund over last three years or five years or ten years. A fund can also calculate the Average Annual Return on the basis of its returns for the whole life of the fund.

It is a clear fact that Average Annual Return is not a compounded rate of return. Annual Returns of a fixed number of years is added and divided by the number of years, to get the figure of Average Annual Return and when the returns are considered, the Expense Ratios are subtracted to get the net value of returns.

This Average Annual Return calculation is necessary to get a clear idea about the Reinvested Dividend. Capital Gain Distribution is also related with Average Annual Return.

The figure of Average Annual Return, is not only important for the mutual Fund Managers and the investment company but also for the individual and institutional investors. The investors can get an idea about the performance of a particular mutual fund in the long term, by studying the Average Annual Return figures of the mutual fund over different periods.It can be mentioned here that though the Average Annual Return figure is really important, the investors should also check out the annual returns of the mutual fund that they are considering to invest in. This is because, an impressive Average Annual Return does not necessarily imply consistency of good annual returns.



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