Understanding Total Return
#1
There's a relationship between net asset value (NAV), yield and total return, but it's complicated. Did you know that a fund's NAV can fall and you can still make money? Or that a fund can yield less than 1%—in fact, it can yield nothing at all—and yet its returns can still be at the top of the charts?

There's two key components of total return in other words you can earn money from your investment in two ways: income (often called yield) and capital appreciation.

Income and Capital Appreciation

Income: A fund's income payout, or yield, tends to interest those investors who need regular income, because they don't necessarily have to tap into their principal for their day-to-day living expenses.

Savings accounts pay income, but so do most bonds and some stocks. If you own a fund that buys income-paying stocks or bonds, the manager passes on any income to shareholders (after taking expenses off the top, of course).

Capital appreciation: The second key way you can gain from a fund is through capital appreciation—that is, if one or more of your fund's holdings is selling for a higher price than it was when the manager purchased it. If the manager sells the new, pricier stock or bond, the fund clocks what is called a capital gain. And even if the manager simply hangs on to the stock or bond that has gained in value, the fund will enjoy capital appreciation; in other words, its NAV will increase. That's because the NAV is a reflection of the value of all of the securities in a fund at a given point in time.

Distributions
As counter-intuitive as it may seem, looking at a fund's NAV in isolation isn't always the best way to check up on its performance. That's because the NAV is vulnerable to changes that don't necessarily affect the true value of the fund.

For example, a fund's NAV will change whenever a fund makes a payment to its shareholders, otherwise known as a distribution. So if a fund with an NAV of say, R50 makes a R10 distribution, its NAV slips to R40.

Despite the shrunken NAV, shareholders are none the poorer. They still have R50: R40 in the fund and another R10 in cash. Unless they need the R10 in income to spend, most investors will reinvest their distributions back into the fund; in other words, they instruct the fund company to use that cash to buy new shares of the fund.

Most total-return numbers reported in newspapers or on the Web, assume that you reinvest your distributions.
If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.

#2
Thanks for this!!


#3
Nice write up! Thanks






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