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Many investors assume that changes in a mutual funds net asset value (NAV) correlate directly to the total return of the fund. Thats not necessarily true as dividends, distributions and sales charges all factor into the equation.

Judging a funds performance based solely on theNAVcan result in poor investment decision making and unintended tax consequences. In this article, well examine how a fundsNAVis calculated and how it, along with the factors mentioned above, results in the funds total return.

A fundsNAVis calculated by taking the total net assets of the fund and dividing by the total number of shares outstanding. For example, if a fund has $100 million in assets and 2.5 million shares outstanding, the fundsNAVis $40.

Want to know more about howNAVis calculated? Clickhere.

All asset additions and subtractions to the fund are reflected in the fundsNAV. If a stock held by the fund pays a dividend, the dividend is added to the funds net assets and results in a rise in theNAV.

Management fees and expenses that are charged periodically by the fund decrease theNAV. Dividend and net realized capital gains distributions paid out to shareholders decrease the fundsNAVas well by the amount of the distribution.

A funds total return takes into account capital gains and losses from the securities held within the fund, dividends and interest earned by the fund, and expenses charged by the fund. Clearly, total return is a more accurate reflection of a funds performance and the return that a shareholder actually receives.

Its important to look at a funds total return and not just any one component of the total return in isolation. Dividend seekers may focus just on a funds yield, but many high-performing funds dont pay a dividend at all. Investors looking only at a fundsNAVmay assume that the fund has posted a loss if theNAVhas declined when, in reality, the fund has delivered a positive total return once dividend distributions are considered.

In case if you are wondering whether mutual funds are right for you, you should read aboutwhy mutual funds, in general, should be a part of your portfolio.

The Fidelity Contrafund (FCNTX) provides a good example of the difference between looking at the fundsNAVand its total return. Contrafund opened 2016 at a share price of $98.95. On the last trading day of the year, the fund closed with anNAVof $98.46. Based onNAVchanges alone, it would appear that the fund lost about 0.5% on the year.

But Contrafund made both dividend and capital gains distributions during the year. Even though those distributions were taken out of the funds assets (and reflected in a lowerNAV), they are still part of the shareholders total return. In total, the fund distributed $3.46 per share in capital gains and $0.29 per share in dividends. Add those to the equation and shareholders of Contrafund actually enjoyed a total return of around 3.4% on the year.

Total return gives a more accurate representation of the return that shareholders will actually see, but there are several elements that will factor into it.

As illustrated above, fund distributions result in the biggest difference between

and total returns. Funds are required to distribute dividends and net capital gains to shareholders on at least an annual basis and many funds make these distributions regularly.

Total returns are often listed with and without sales charges. Commissions get taken right off the top before an investment is even made.

can be adjusted usingfair value pricingif security prices within the fund are stale.Swing pricingcan adjust an

if there are large purchases or redemptions within the fund.

When judging the overall performance of a mutual fund, always look at the funds total return instead of just the changes in itsNAV. Distributions made by the fund may reduce the fundsNAVbut they still belong as part of the shareholders overall return. Viewing returns in this manner gives a more accurate depiction of a funds success.

Be sure check ourNews sectionto keep track of the recent fund performances.

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