If you’re thinking about investing in mutual funds it makes sense you’d want to look into the potential returns you could expect first. Diving in with no knowledge of what to expect is a great route to disaster.
So what can you expect? Here are some points to remember.
Remember the word ‘average’ means just that
You must understand this. An average mutual fund return is gauged over a period of time. This means one year might bring a return of 10% (this is over the entire mutual fund market, rather than one in particular). It also means another year might bring an average return of just 2% or even less. It all depends on the market conditions and how well or badly the stock market is doing.
The word ‘average’ covers the entire market. So while one mutual fund might be doing really well and achieving, say, 20% compared to that 10% average example above, another mutual fund might only clear 5%.
So do average returns really mean anything at all?
They do – but you have to know in what context they are applied to. You could be looking at the market as a whole or the mutual funds created by a particular company, like Standard and Poor for example. The trick is always to set your boundaries before you start looking into averages. They are only useful up to a certain point.
What factors can affect the average returns achievable?
This is a good question to ask. Clearly a company that is good at managing its mutual funds will produce a better than average return than a company that isn’t historically as good at managing theirs. This is despite the fact they are both trading in exactly the same marketplace at exactly the same period in time.
Another factor to consider is the fees you will be charged annually to be part of a particular fund. There could be two funds with the same average return when compared to the market as a whole, but if one company has higher fees than the other, the lower fee mutual fund will perform better overall.
Does it help to gauge average returns?
Providing you know what you are looking for and you ensure two or more funds are compared on a level playing field, averages can indeed be useful. You obviously want to earn as good a return as you can from your chosen fund. A spot of research can go a long way towards helping you do this.
The more specific you can be the better. History can only show you how the market has performed over a specific period of time. Don’t just look at the past year or two for a particular fund – go back further to get a better average.
Holding mutual funds for a longer period of time is the best way to ensure you can get the best average return available, no matter which fund you invest in.