Compare Mutual Funds
With These Key Statistics

The following key statistics can be used to compare and evaluate mutual funds within the various categories that represent your investment universe. You'll find many sources of these key statistics on the Web. Some are more comprehensive than others, so you'll have to try a few and decide which you like best.

Mutual Fund Returns

• Arithmetic Mean - When computed from NAVs, this is the periodic return after expenses.
• Geometric Mean - This is the compound return and will tell you how well you would have done if invested over the period of interest.
• Yield - Dividend yield, bond yield, etc., should be included in returns computed from NAVs to get the total return.
• Risk-Adjusted Return - This is really a performance measure, as it considers both return and risk. As noted above, returns are meaningless when not taken in context with the attendant risks. It's a good metric for the layman, as it is much more intuitive than the other measures of risk-to-return, but it's not as reliable as the Sharpe ratio for comparing mutual funds.

Mutual Fund Risk

• Standard Deviation - Measures a security's volatility relative to its mean return.
• Beta - Measures volatility relative to a major market index. Interesting but not particularly useful unless the security is a component of the index.
• R-squared - The movement in a security that can be explained by movement of a major market index. It is the square of the correlation coefficient but its square root is an absolute value, which doesn't tell you whether the correlation is positive or negative. Interesting but not particularly useful unless the security is a component of the index.
• Bond Duration - The proper measure of a bond or bond portfolio's interest rate sensitivity.

• Coefficient of Variation - A quick and dirty means of measuring risk-to-return.
• Sharpe Ratio - This is the hands-down winner. It is a measure of excess (real) return per unit of total risk, i.e., a mean-variance measure. When comparing mutual funds invested in the same universe, the Sharpe ratio will identify the one that is more efficient.
• Treynor Ratio - The Treynor ratio is a measure of total return to systematic risk. As such, it takes into consideration the degree of diversification of a portfolio. As mutual funds are portfolios, the Treynor ratio is useful for evaluating the competence of mutual fund managers.

• Expense Ratio - A mutual fund with an expense ratio higher than its category average must be consistently beating the category average return to justify the difference. Returns computed from NAVs are net of the expense ratio and thus make a fair comparison.
• Turnover - Higher than average turnover is also a concern, as the trading costs must be covered by profits from the trades and capital gains liabilities are created in non tax-deferred accounts. Returns computed from NAVs are also net of trading costs attributable to turnover.
• Manager Tenure & Succession - Preference should always be given to mutual funds with good long-term records under the same manager. The manager should have a co-manager and/or a protégé to ensure the fund will continue to be managed in the same manner in the manager's absence.

• Calculating Annual Returns