Understanding Relative Return: Evaluating Your Mutual Fund Manager

Relative return on a mutual fund is only calculated in comparison to a benchmark. Most mutual funds seek earnings in a relative return manner, either choosing to beat a specific index or even the market as a whole. When it comes time to determine how successful your manager has been, you can use the benchmark of other mutual funds.

Pick Similar Funds

You have to compare apples to apples with relative return modeling. There are some mutual funds that are more aggressive than others, and these funds could post much higher returns than your fund in an average year if you are risk-averse. However, you are not willing to roll the dice in those funds, so you cannot use them as a comparison. 

Compare Manager to Manager

There are some elements in a fund that are not controlled or affected by the manager. For example, your fund may have higher sales fees or transaction fees than another fund. It is not your manager's job to set these; it is the investment institution's job. That said, you can compare the number of transactions your manager completed for a fee with another manager's transactions. This is a better indicator than summing the costs of transactions on both funds.