Actual Return Details

Actual return is different from expected return, which refers to the predicted or anticipated profit or loss on an investment. For example, let’s say that a mutual fund manager trades in common stock, suggesting that investors’ investment will grow by 7% each year. If you participate in the mutual fund, you can expect this growth, but the actual result will likely be different. Whether the actual return is higher or lower than anticipated, analyzing the causes for the disparity between actual and expected return may help understand the risk factors coming from both the market and the mutual fund manager.

To protect investors, the Securities and Exchange Commission (SEC) requires mutual fund managers to be more transparent and realistic to investors regarding expected returns. To put it simply, mutual fund companies need to clearly distinguish actual and expected returns so that investors don’t have false expectations. An example of this is when a mutual fund manager presents a speculative profit and cost of an investment. They need to back it up with historical data to show that numbers are not dissimilar to what would’ve happened in reality.

Apart from direct causes like risk factors, there are also indirect causes affecting actual return, which include trading costs, inflation, taxes, administration fees, investment timeframe, and whether there are additional investments or withdrawals during the period. The formula to calculate actual return is as follows:

  • Actual return = Current Balance – Initial Balance

Real-World Example of Actual Return

Fidelity Advisor Equity Growth Fund is a mutual fund that deals primarily in common stocks. Its managers usually invest in companies with above-average growth potential (these companies’ stocks are often called “growth” stocks). The mutual fund also has a section showing how it performs using average annual total returns (a type of expected or assumed return) as an indicator. The fund would have produced the same cumulative total return if the performance had been constant year by year.

That said, Fidelity put out a disclaimer for potential investors. “Current performance may be higher or lower than that quoted. Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold.”

The quote above is a testament that there is always be a risk of investing, even for mutual funds known for having relatively low risks. Fidelity Advisor Equity Growth Fund also lists potential risk factors that include:

  • Stock markets are volatile and may decline drastically due to adverse issuer, political, regulatory, market, or economic developments.
  • Foreign securities are comparatively riskier as they may incur additional fees in the form of currency exchange rates, interest rates, and political and economic risks.
  • ‘Growth’ stocks don’t perform uniformly on the market; one type of stock can be more volatile than the other.

Significance of Actual Return

We use actual return as a basis for calculating a rate of return (RoR), a percentage representing net gain or loss against the investment’s initial cost. The formula to calculate it is as follows:

  • Rate of Return = Active Return / Initial Balance X 100%

Rate of return can be used for any investment vehicle, including real estate and stocks, as long as it is purchased at one time and sold/realized at some point later. Often, investors use RoR as an essential part to assess an asset against another of the same type, determining which investments are more profitable.

You can also use actual return for a company’s pension plan assets, also known as actual return on plan assets. The formula to calculate it is as follows:

  • Actual Return on Plan Assets = Current Balance – Initial Balance + Benefits – Contributions