Look closely: mutual funds return more than they yield
Q. Would you please explain the arithmetic about returns on mutual fund shares? For instance: If a person would invest $1,000 in Fund A, which sells for $40, I suppose she would get 25 shares, and the same amount invested in Fund B selling at $100 would get her 10 shares. Assuming they are both no-load funds, the expenses are the same for both funds, and the investor gets a return of 20 percent from both funds, what would she get from Funds A and B? Are return and yield the same? - A.C., Cumberland, R.I.
A. If the funds earned 20 percent, says fee-only financial planner Gary Schatsky, in New York, they would now each be worth $1,200, or a gain of $200. Shares in Fund A would be worth $48 ($200 divided by 25, equals $8, which you would add to the original $40); Shares in Fund B would be worth $120 ($200 divided by 10 equals $20, added to the original $100.)
Return and yield, he says, are not the same. "Yield is the cash payout, the income distribution, by a fund.
"Return is the distribution plus the capital appreciation (increase in profits) in the fund - the underlying added value of each share."
Be sure "you never look just at yield in measuring a fund," says Schatsky. Sometimes "yield is inflated through a return of principal." That usually happens with bond funds, but even some stock funds boost yields to look good.
Q. My mutual funds are earning terrible returns. The fund company, a load-fund company, is not helpful in guiding me to better-performing funds. If I sell the funds, which are not in tax-sheltered accounts, I will incur a large capital-gains bill at the end of the year. What alternatives do I have? - Name withheld, New York
A. You really have only two choices, says David Bendix, of Bendix Financial Group, Uniondale, N.Y. Keep the funds, and hope for a rebound, or sell them and invest elsewhere.
The second option means biting the bullet on the capital-gains tax, he adds, even if you switch to another non-tax-sheltered, fund within the same fund group.
Perhaps you have some other low-performing investment that you could sell for a loss to offset your gains.
"From the sounds of what you say, I'd get my money out of your fund group and go elsewhere," says Bendix.
Questions about finances? Write: Guy Halverson The Christian Science Monitor 500 Fifth Ave., Suite 1845 New York, NY 10110