Calculating mutual fund returns is not as easy as it sounds. Too often, when investors are calculating returns, they account for only the explicit costs of trading, and they forget about the implicit tax costs. These costs can significantly reduce the amount of a fund’s return. Remember to invest wisely and account for after-tax returns.

Calculating total returns: Mutual fund returns include dividends, capital gains, and interest, as well as any net asset value (NAV) appreciation. The basic equation for total return is as follows:

((ending NAV – beginning NAV) + distributions) / beginning NAV

Before using this equation, be sure to adjust your beginning and ending net asset values to account for the costs of both front-end and back-end loads. These costs will significantly decrease your return.

Calculating before-tax returns: Calculating before-tax returns is the simplest equation in calculating mutual fund returns; before-tax returns are the same as total returns if all distributions are reinvested. The before-taxes total return includes the increase in the net asset value and the increase in the number of shares. The total return before taxes is calculated as follows:

((#ES * EP) – (#BS * BP) + distributions) / (#BS * BP)

In the before-tax returns equation, the variables are defined as follows:

#BS = beginning shares owned

BP = beginning price of the shares

#ES = ending shares owned

EP = ending price of the shares

Calculating after-tax returns: Calculating after-tax returns is more difficult because you must know your marginal tax rate at the federal, state, and local levels; you must also know the tax rate for the different types of distributions. If all distributions are reinvested, the after-tax total return includes the increase in the net asset value, the increase in the number of shares, and the after-tax impact of distributions. The after-tax (AT) total return is calculated as follows:

((#ES * EP) – (#BS * BP) + ATSD + ATLCG + ATSCG + ATBDI) / (#BS * BP)

In this equation, the variables are defined as follows:

#BS = beginning shares owned

BP = beginning price of the shares

#ES = ending shares owned

EP = ending price of the shares

ATSD = stock dividend distributions * (1 – the tax rate on stock dividends)

ATLCG = long-term capital gains distributions * (1 – the tax rate on long-term capital gains)

ATSCG = short-term capital gains distributions * (1 – the tax rate on short-term capital gains)

ATBDI = bond dividends and interest distributions * (1 – the tax rate on interest)

Remember that the tax rate on short-term capital gains (this tax rate does not apply to capital gains on stocks), bond dividends, and interest is your marginal tax rate, which includes your federal, state (if applicable), and local tax rates (if any).