Financial Quotient

What is total return?

WHAT DOES IT MEAN?

Total return is the actual gain or loss from an investment or investment portfolio over a given period of time.

It is expressed as a percentage of the initial amount invested and takes into account price appreciation or depreciation of a particular asset or the underlying assets in a mutual fund's portfolio.

It also factors in the income received from dividends and interest payments, assuming all distributions are reinvested, as well as any operating or distribution expenses deducted from a fund's assets.

A fund's reported total return may also take into consideration sales charges or brokerage commissions.

WHY IS IT IMPORTANT?

Total return is a more accurate measure of an investment's overall performance as it looks at the bigger picture instead of just one particular metric, reflecting the true growth of that investment over time.

For example, a mutual fund investor might see a decline in a fund's net asset value but still receive a positive total return once dividend or interest distributions are considered.

Some mutual funds therefore take a total return approach to their investment strategies, maximising returns for investors by relying on multiple sources of growth, whether through capital gains or yield, within or across asset classes.

This type of diversification can also reduce a portfolio's exposure to market risks and volatility.

A total return bond fund, for instance, could seek to give returns to fixed income investors through a combination of interest income, changes in bond prices, and/or currency gains.

IF YOU WANT TO USE THE TERM, JUST SAY:

A mutual fund with a total return strategy can provide an investor with diversified sources of return and maximise gains while minimising risk, so as to meet his investment goals at a predetermined level of return.

A version of this article appeared in the print edition of The Sunday Times on November 05, 2017, with the headline 'What is total return?'. Print Edition | Subscribe