Subject: Mutual Funds - Average Annual Return

Last-Revised: 24 Jun 1997
Contributed-By: Jack Piazza (seninvest at aol.com)

The average annual return for a mutual fund is stated after expenses. The expenses include fund management fees, 12b-1 fees (if applicable), etc., all of which are a part of the fund's expense ratio. Average annual returns are also factored for any reinvested dividend and capital gain distributions. To compute this number, the annual returns for a fixed number of years (e.g., 3, 5, life of fund) are added and divided by the number of years, hence the name "average" annual return. This specifically means that the average annual return is not a compounded rate of return.

However, the average annual returns do not include sales commissions, unless explictly stated. Also, custodial fees which are applied to only certain accounts (e.g., $10 annual fee for IRA account under a stated amount, usually $5,000) are not factored in annual returns.

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