Measuring Performance · Mutual Funds

Your personal investment result depends on when money enters and leaves the fund. The fund's published return describes its investment performance under a stated convention, not necessarily the return earned by your account.

Separate the manager's result from your cash flows

A time weighted return links investment returns across intervals while neutralizing external contributions and withdrawals. A money weighted return gives weight to the amount and timing of invested money. The first is useful for evaluating investment performance. The second helps describe the experience of a particular investor.

Follow a simple timing example

You invest $100 before a year in which the fund gains 50%, leaving $150. You then add $900, bringing the balance to $1,050. The fund loses 20% in the following year, leaving $840. The fund's cumulative time weighted return is 1.50 times 0.80 minus one, or 20%, but your account ends below the $1,000 you contributed.

Calculate the personal rate carefully

For annual intervals in that example, a money weighted annual rate r satisfies 100 times (1 plus r) squared plus 900 times (1 plus r) equals 840. The economically relevant solution is approximately negative 14.74%. For irregular dates, use a dated cash flow calculation and check signs, dates and closing valuation. Complex flow patterns can produce ambiguous internal rates of return.

Treat the difference as information

A disappointing personal result does not prove the published return is wrong. Large purchases after a strong period can place more capital at risk before a decline. Withdrawals can also change the experience. Investigate the timing rather than treating either return measure as a complete explanation.

Keep a useful account record

Record contributions, withdrawals, fees paid outside the fund and reinvested distributions. Reinvestment is not an external deposit of new savings, although it changes units owned. Compare your account result with a consistent benchmark using the same cash flows when assessing the decisions you actually made.

Try it yourself

Two investors own the same fund, but one adds most of their money just before a decline. Must their personal returns be identical?

Show the worked answer

No. Identical fund units can produce different investor returns because different amounts were invested at different times. Compare dated cash flows before drawing conclusions.

Further reading

Educational material, not a recommendation to buy or sell a fund. Numerical examples are hypothetical. Fund terms, investor eligibility and tax treatment vary by product, account and jurisdiction.

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