What is the frontend 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 noload fund, the default value will be 0, and you
can safely ignore it.
What is the backend load?
The default value is the maximum backend 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 backend 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 activelymanaged funds, turnover can vary somewhat from one year to
the next. (The variation with lowturnover 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 largercap 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 "marketmoving" 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 stockmarket 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 $1ashare 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%  onefourth of $4  but about
7%  onefourteenth 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
taxmanaged 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 $20pershare
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 shortterm?
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*(1f)*(1b)*(1 + c + y*(1i)
+ S*g*(1s) + (1S)*g*(1l))^N
where:
A = amount invested
f = frontend load (may be 0)
b = backend 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 taxsheltered
accounts)
S = percentage of distributed gains that are shortterm
g = distributed gains  see below for definition
s = taxrate on shortterm gains
l = taxrate on longterm 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) * (1d)  1
where:
d = percentage of capital to be realized
as gains
C = raw capital appreciation, defined by
C = r  I  y
where:
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 longterm
and shortterm components of (g). We assume that taxes are withheld from
any distributions and the remaining portion of the distribution is reinvested.
