Reading Fund Tables

When you shop for mutual funds, it helps to be able to read a fund table. A fund table is a snapshot of a mutual fund that usually includes some or all of the following:

Investment performance
Relative ranking
General fund information

Let's take a look at each of these major categories.

A mutual fund table shows the investment performance for a fund for several holding periods.

Investment performance is measured as the rate of return that an investor would have earned in the past had they owned shares in the fund for that period. A fund's past investment performance is also referred to as its historical performance and is not necessarily an indicator of the fund's future returns.

Mutual funds are required to report year-to-date, one-, three- five- and 10-year returns. Returns for periods longer than one year are shown as average annual returns. If the fund has been in existence for a shorter period, the fund is required to show its average annual return since its inception date

To make it easier to compare funds, returns assume that investors reinvest any dividends and capital gains during the period that the return is calculated for. You reinvest your dividends and capital gains by letting the fund keep the money in exchange for selling you additional shares.

The following table shows investment performance for ABC and XYZ Funds, two fictitious mutual funds that each have assets under management of $100 million. Returns for periods longer than one year are annualized:

When evaluating the past performance of a mutual fund, keep in mind that past returns are not a guarantee of future returns. You should also evaluate the long-term performance of the fund and not just look at its short-term performance.

You can see that while Fund ABC has done better than Fund XYZ for the year-to-date and one-year periods, Fund XYZ outperformed ABC for the longer periods.

Relative ranking
Fund-ranking companies such as Morningstar and Lipper Inc. rank the relative performances of mutual funds. Morningstar uses a five-star rating system while Lipper publishes an A-to-E letter grade in the Wall Street Journal, with an A being assigned to the top 20% of mutual funds within a category. Each successive lower letter grade represents the successive 20% of funds in the category.

Morningstar, Lipper and other fund-ranking companies apply their own analysis and methods to come up with a fund rating. They may look at risk-adjusted returns or other fund performance data as part of their ranking-assignment process. Generally, funds with more stars or higher letter grades are preferable to those with fewer stars or lower letter grades.

Funds are categorized according to their investment objective and compared with other funds in the same category. These funds are called peer funds. While the first barometer of a fund's performance is how well it did compared to its benchmark index, a relative ranking focuses on showing how well a fund does against its peer funds.

For example, Funds ABC and XYZ might show the following relative rankings:

In this case, Fund ABC has an A grade for the year-to-date and one-year periods, suggesting its performance is in the top 20% of its peers. However, over the three-year period, Fund XYZ earns an A grade while ABC manages only a B grade.

A fund table is also likely to include general information about the fund. General information may include the number of years a fund manager has remained in charge (generally, the longer the better), phone number and amount of initial required investment.