How to Assess the Quality of Mutual Fund Analysis

Mutual fund analysis is meant to assist you in determining whether one fund offers an advantage over another. In order to make this comparison, you will need to be aware of certain terms and formulas used to generally assess the value of a fund. These terms, when uniformly applied, will be the basis of sound analysis. You should look for reports that include this information in order to best assess which mutual fund is right for you.

Absolute Return

The absolute return of a mutual fund is the actual profit it earns over the initial investment. For example, in a simple scenario, if you paid $1 for your share in the fund and received $4 back, your absolute return would be 4:1. This is over-simplified for the purpose of understanding absolute return, but the actual formula used to determine the absolute return of a fund is not largely different from this simple model. It is valuable to know the absolute return, but an analysis using only absolute return is failing to compare this return to other benchmarks, which is the model for relative return. Further, some mutual funds are actually termed "absolute return funds," meaning they have different goals than relative return funds. They engage in riskier maneuvers such as short selling, leveraging and trading on derivatives.

Relative Return

The relative return of a mutual fund is typically a better analysis for a less sophisticated investor. The relative return of a fund takes the absolute return and compares it to a benchmark. For example, relative return can compare two mutual funds to each other, a mutual fund to the S&P 500, or a mutual fund to the market as a whole. This helps an investor learn how to make her money go furthest, not just earn good returns on a mutual fund investment.


Volatility is a word to describe the risk of a mutual fund based on how much its returns jump around. A more volatile fund will have a wider standard deviation, meaning the spread of returns can be unpredictable. When you are considering a mutual fund analysis, look for volatility as expressed in standard deviations and expressed in terms of beta. Beta is a benchmark. Just like you can use absolute return or compare returns to a benchmark, you can think of volatility on its own or in terms of comparison to another fund or market. This comparison is essential to gain real insight into mutual fund performance.

Other Analytical Information

There are some pieces of information on a mutual fund analysis that are less mathematical and tangible. For example, who is the fund manager? How long has the manager been with the fund? What is the fund's "style" or form of investing? How consistent has this style been over time? These answers can give you insight into how a fund will perform in the long run according to your goals. If they are easy to answer, the fund likely shows a consistent approach to investment, which is generally more desirable for investors than a fund that constantly changes strategies.

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