What is the front-end load?

If this is a load fund and you’re contemplating a new investment in the fund, you should keep the default value.  If you’re projecting results for a load fund that you already own, the load is a sunk cost and you should set it to 0.  If this is a no-load fund, the default value will be 0, and you can safely ignore it.

What is the back-end load?

The default value is the maximum back-end load for the fund, which in many cases declines if you hold the fund long enough. You should adjust this value if your holding period is long enough to give you a discount on the back-end load, or perhaps eliminate it entirely.

What do you expect the expense ratio to be in the future?

In most cases you should leave the default.  However, you may want to change the default if your fund is currently waiving its normal fee, or if it is a “fund of funds” that invests mainly in other funds. In the latter case, the default expense ratio might not include the expense ratios for the funds that your fund owns.  Be sure to read the fund’s prospectus carefully to see what it says about fees and expenses.  Also, many funds do raise (or lower) their fees.  You may want to experiement to see the effects of possible changes.

What do you expect for turnover?

The default value is last year’s actual turnover.   High turnover funds seldom become low turnover funds, or vice versa, but with actively-managed funds, turnover can vary somewhat from one year to the next. (The variation with low-turnover funds, such as most index funds, is likely to be a lot lower.) You should adjust this number if you believe that future turnover will be significantly different from last year’s.

What are the fund’s transaction costs?

We multiply this number by turnover to estimate the fund’s actual transaction costs. Our default value depends on the type of fund, for example, 1.24% in transaction costs for every 100% turnover — $1.24 for each $100 of assets in the fund for a larger-cap U.S. stock fund. For a Municipal Bond fund, the default value is 0.43% in transaction costs for every 100% turnover.  This estimate is based on statistical studies only. It would be nice if the funds told people what their transaction costs actually were, but this would be difficult.  (The brokerage commissions would be easy to quantify, but not the “market-moving” costs of their moving in and out of a stock.)  And in any event, they don’t.  So the best we can do is estimate.  You may want to adjust this number if you have information suggesting that the fund’s internal transaction costs are different from the category defaults.

What do you expect for average dividend yield?

This is your estimate of the the future dividend yield on the fund. Namely, the dividends it passes through to you from stocks and the interest it passes through to you from bonds.  (It does not include capital gains distributions.)

Our default value is last year’s yield.  If the fund began the year at $10 a share and paid out 30 cents a share in dividends — that would be a 3% yield.

Yields fluctuate.  The current yield on the S&P 500, for example, is about 1.4%, while the historical average has been about 4%.  You may wish to adjust the expected yield if you believe future yields will be significantly different.  The two things that would send low yields higher in a stock-market mutual fund would be:  A corporate trend toward paying out a higher percentage of profits in dividends.  (Right now, for tax reasons and to enhance management stock options, the reverse trend has been dominant.)   Or, second: A sharp drop in stock prices relative to profits.  But if you are assuming a fairly high rate of growth for this fund, you are probably not assuming a sharp drop in price/earnings ratios.

What percentage of the fund’s capital do you expect to be distributed as taxable capital gains each year?

I’m sorry, but this is almost a trick question, so you have to pay attention.  What you would expect here is a number like 25% — the fund began the year at $10 a share, and appreciated by $4 a share, say, over the course of the year, including good gains in a lot of stocks it still owns.  It sold some of its winners along the way and (net of losses from any losers it sold) wound up sending you $1-a-share in taxable capital gains distributions.   That would be 25%.  Namely, it appreciated by $4 and sent you a taxable distribution 25% as big.

But that’s not the number we’re looking for.  Rather, we want to know how that $1 in taxable gains compares not with the year’s $4 of appreciation, but with the entire $14 value to which your shares had appreciated.  So in this example, the answer would be 25% — one-fourth of $4 — but about 7% — one-fourteenth iof $14.

Sorry to do this to you.

The default value is based on last year’s actual results.  If you believe that the fund’s future rate of realized capital gains will be different from last year’s, adjust this value.

An adjustment cries out to be made particularly in two kinds of cases:

* Say the fund lost money last year, or made just a little.  And it paid out NO realized gains, because, truthfully, it had none.  Or very few, which were more than netted out by its realized losses.  We would show it with a 0% default value, meaning we expected it never to expose you to any taxable distributions.  Well, this is ridiculous.   Yes, there are some funds that are so well tax-managed that you can fairly assume little if any taxable capital gains distributions will be made each year.  But in this example, it wasn’t brilliant tax management that produced the good result (buying and holding, ornfinding losses to offset gains when selling) — it was rotten investment returns.   So unless you are projecting continued rotten returns (in which case, you probably don”t need to go much further with your analysis to know what to do with this fund), you should most surely adjust our default number.  For example, if you’re projecting a 12% annual return from this fund before costs . . . and if you figure most of that will come from appreciation as opposed to dividends . . . and if you figure that 30% of that appreciation will be mailed to you in the form of taxable capital gains distributions each year . . . then an appropriate guess for this field would be about 3%.   (You are expecting 12% in total return from the fund before fees and such.   But after fees, and after allowing for the fact that a little of that return will come from dividends, maybe you’re looking to 10% in appreciation, of which you figure 30% may be distributed in realized, taxable gains: namely, 3% of the total investment.)

* Or say the fund had a spectacular year last year.  Up 100%!  It started the year at $10 and ended at $20 just before it paid out $5 in taxable gains.  The number we would show here is thus: 25%.   (Because $5 is 25% of your entire $20-per-share investment.)  But now, say, you have told us you expect the fund to grow at a more sensible 10% a year.  After all, looking forward 10 or 20 or 30 years, that’s a lot more reasonable to expect.  No way would taxable distributions in this situation equal 25% of the value of your shares each year.  If you stuck with our default, you’d get a crazy, stupid result.   (Admittedly, this is a pretty crazy, extreme example.)  Chances are, you’d want to use a figure more like 5% in this example.  (If the fund continues to pay out about 50% of its appreciation each year, and it appreciates 10% a year, then it’s paying out about 5% in taxable capital gains distributions.)

What percentage of the distributed capital gains do you expect to be short-term?

Our default value, 30%, is based on industry averages.  Unfortunately, public filings such as annual reports and prospectuses seldom contain this information.  So if you want a more accurate figure your best bet may be to look at your own account statements (if you’ve owned the fund for any length of time) or call the fund family.

How we calculate estimated future value

The short answer is:  We take all these assumptions and do the math.  That is really all most people need to know.   Stop reading.

But for those of you with a penchant for this sort of thing, here is our formula to project future value:

A*(1-f)*(1-b)*(1 + c + y*(1-i)  + S*g*(1-s) + (1-S)*g*(1-l))^N


A = amount invested
f = front-end load (may be 0)
b = back-end load (may be 0)
c = capital appreciation — see below for definition
y = yield
i = applicable rate of income tax (will be 0 in case of muni bonds and for tax-sheltered accounts)
S = percentage of distributed gains that are short-term
g = distributed gains — see below for definition
s = tax-rate on short-term gains
l = tax-rate on long-term gains
N = number of years in holding period

distributed gains, g, and capital appreciation, c, are defined as:

g = (1+C) * d

c = (1+C) * (1-d) – 1


d = percentage of capital to be realized as gains
C = raw capital appreciation, defined by

C = r – I – y


r = gross rate of return on assets before costs.
y = yield
I = investment cost (sum of expense ratio and transaction costs)

In other words, we estimate the expected capital appreciation for the fund by subtracting yield and investment costs from total return (the result is C).

Then we use a ratio (d) to figure out how much of this capital appreciation will be distributed (g) and how much will stay in the fund (c).

From there we figure out the long-term and short-term components of (g).  We assume that taxes are withheld from any distributions and the remaining portion  of the distribution is reinvested.