Fund return describes the profit a fund generates over a defined period, usually stated as an annual percentage rate. It is essential to distinguish between gross return and net return.

• Gross return reflects the performance before fees.
• Net return represents the performance after all fees have been deducted.

For investors, the net return is decisive because it reflects the actual increase in the value of the invested capital.

Fund providers typically report performance figures on a net basis, meaning that all fees, such as management fees or front-end loads, have already been deducted. Nevertheless, investors should be mindful of this net performance and not focus solely on low fees. What ultimately matters is how much return remains after costs, as all fees directly reduce the investor's return.

Performance figures often assume that the investor remained fully invested throughout the entire period. In practice, individual investor returns may differ. For example, investors who buy during market highs and sell during downturns may achieve significantly lower returns than the fund's stated performance. The official performance numbers represent the return of a continuously invested buy-and-hold investor.

Timing errors, such as entering the market during a peak or selling in panic, can lead many private investors to achieve lower returns than suggested by the fund statistics.

In short, published fund returns are an important metric, but an investor's personal net return may differ because it is influenced by costs and individual behaviour.

Fund return is generally calculated using a time-weighted approach. This method measures the fund's performance over a specific period independent of investor cash flows.

A simple example illustrates the principle:
If a fund unit is priced at EUR 100 at the beginning of the year and reaches EUR 110 one year later, including distributions and price appreciation, the return is 10 percent.

For multi-year periods, the annualised return is often shown. It is calculated by spreading the cumulative return evenly across the observed years. For example, a cumulative return of 35 percent over five years corresponds to an annualised return of approximately 6.2 percent because 1.35^(1/5) equals roughly 1.062.

Ideally, reinvested income such as dividends or interest should be included in these calculations so that the return reflects the true increase in value, including the compounding effect.

It is important to distinguish between time-weighted return and money-weighted return.

Time-weighted return

• Measures the fund's performance without the influence of investor behaviour
• Suitable for comparing funds with each other
• Is the standard for fund reporting

Money-weighted return (internal rate of return)

• Reflects an individual investor's actual return
• Incorporates the timing and magnitude of contributions and withdrawals
• Can differ substantially from the published performance depending on investor decisions

For fund evaluation, time-weighted return is the appropriate measure because it isolates the fund's actual investment performance. For investor-specific assessments, the money-weighted return may differ, as described above.

Every fee, whether it is an annual management fee, an upfront sales charge or other ongoing costs, reduces performance. It is deducted from the gross return so that the reported net performance is already shown after costs.

Investors should focus on net performance rather than solely on low fees. A higher fee level must be justified by correspondingly higher returns. Otherwise, the investor effectively loses money. Over the long term, even small cost differences can have a significant impact. An annual fee of 1.5 percent versus 0.5 percent may appear minor, but over several decades it can result in a difference of thousands of euros in final portfolio value.

For this reason, many experts advise minimising costs, especially in broadly diversified standard investments such as large index funds (ETFs). In such cases, low fees are a clear advantage. For example, an ETF on a global equity index often has a total expense ratio (TER) of below 0.2 percent p.a., while active funds may charge more than 1 percent p.a. Here, the rule applies: The more standardised the investment, the more important low costs are.

However, investors should not look at costs in isolation. The cheapest solution is not automatically the best. In certain market segments, a strict focus on the lowest possible cost level can even reduce return potential. In areas such as multi asset funds or flexible bond funds, low-cost products sometimes underperform because they exclude entire segments of the investment universe in order to keep costs down.

A fund that is primarily designed to be low cost may invest very closely in line with the market index (benchmark) and avoid supposedly more expensive but return-enhancing niches. This behaviour is often referred to as "benchmark hugging". The fund management stays very close to the benchmark instead of actively exploiting opportunities. The result can be missed sources of return and, in some cases, even higher risk due to insufficient diversification.

Investors should therefore not be blinded by low-cost products but should always assess net performance after costs. A somewhat more expensive fund can still deliver a better outcome if skilled management generates higher gains or smaller losses over time.

Transparency is essential. Investors should ensure that all costs are included in the performance calculation and be cautious with funds that apply non-transparent or hidden fee structures.

Return figures alone do not provide a complete assessment. High fund returns are only meaningful when viewed in relation to the risk taken. A fund that generates a return of 15 percent may appear attractive, but the underlying strategy might have incurred temporary losses of 30 percent. To evaluate this properly, investors need to consider key risk metrics.

Important indicators include volatility, maximum drawdown and the Sharpe ratio.

• Volatility measures the degree of fluctuation in returns. High volatility means that the fund price moves strongly up and down, indicating higher risk and potentially larger interim losses. Volatility also shows how stable or unstable a fund has been across different market environments. Many funds provide volatility figures in their key information documents, often summarised in the Synthetic Risk and Reward Indicator (SRI), which places the fund on a scale from 1 (low risk) to 7 (high risk). Volatility helps investors assess whether the risk taken aligns with their expectations.
• Maximum drawdown captures the largest peak-to-trough decline within a defined period. It answers the question: How much value did the fund lose in the worst observed downturn? For example, if a fund falls from EUR 100 to EUR 60, the maximum drawdown is 40 percent. This metric is particularly relevant for risk-averse investors who want to avoid large losses. It highlights how the fund behaved during periods of market stress such as the financial crisis in 2008 or the market turmoil in 2020. A low maximum drawdown indicates resilience in challenging market conditions.
• The Sharpe ratio measures return per unit of risk. It compares the excess return of the fund (return minus the risk-free rate) with its volatility. A higher Sharpe ratio indicates a more efficient balance between return and risk. A fund with a 10 percent return and high volatility may have a lower Sharpe ratio than a fund with a 7 percent return and low volatility. The latter compensates investors better for each unit of risk taken.

These and other metrics help place fund returns in the correct context. Return and risk must always be viewed together. The quality of a fund becomes apparent in how consistently and robustly it generates returns. When analysing funds, investors should therefore complement performance figures with the relevant risk indicators.

Another key factor in assessing fund returns is the investment horizon. Returns can vary significantly depending on the selected observation period. The same fund may show a negative one-year return but a strong positive return over five years.

Short-term performance is often of limited value because it depends heavily on the chosen start and end dates. For example, if a performance chart begins at the lowest point of a market downturn, subsequent returns may appear overly strong. If the measurement starts shortly before a correction, the picture may look significantly weaker.

The general rule applies: The longer the period, the more meaningful the return assessment. A long-term comparison over five or preferably ten years provides a more realistic view because it captures multiple market phases, including periods of expansion and contraction.

Ideally, a fund should be evaluated across full market cycles. Important questions include: How did the fund perform during upturns? How resilient was it during downturns? Did it experience heavy losses in periods of stress, or did it demonstrate stability? These questions can be answered by reviewing returns in specific crisis years, such as 2008 or 2020, as well as by examining the maximum drawdown during these periods. A robust fund delivers consistent results, not only in favourable markets.

Investors must also keep in mind that past performance does not guarantee future results. Strong historical returns do not imply that a fund will continue to outperform. Markets evolve, investment trends shift and conditions that supported past performance may not persist. This phenomenon is often described as mean reversion, where asset classes or investment styles that have significantly outperformed tend to revert to long-term averages.

Investors who simply follow last year's strongest performers risk entering areas that may have already peaked. A typical behavioural error is assuming that a series of strong years will continue indefinitely. In practice, consistency is more important than short-term outperformance. A fund that delivers steady returns with moderate risk over many years is often more reliable than the current top performer on a one-year ranking list.

When a fund repeatedly appears at the top of short-term rankings, it is worth examining what is driving the performance. Is it the result of elevated risk, a narrow investment focus or a favourable but temporary market environment? Sustainable performance requires resilience across different conditions.

A long-term mindset is therefore essential. Investors who regularly switch into the latest top-performing fund often invest cyclically and may miss the actual value creation. Long-term investing and avoiding short-lived trends is typically a more effective strategy, even though it does not preclude taking advantage of supportive market developments.

Return figures only become meaningful when viewed in the right context. A common mistake is comparing funds with fundamentally different investment profiles. A fair comparison requires similar levels of risk. For example, a money market fund cannot be meaningfully compared with an equity fund because their objectives and risk characteristics differ significantly. Even within the same category, differences exist: Some multi asset funds take on substantial equity exposure, while others follow a defensive approach.

Before comparing returns, investors should therefore examine the fund's risk profile. Categories such as defensive or aggressive are not always precise enough. Hard metrics provide a clearer picture, including volatility and maximum drawdown. If these indicators are broadly comparable, a performance comparison becomes more meaningful because the funds have taken similar levels of risk.

A suitable benchmark is also essential. Many funds define a benchmark index they aim to outperform. However, two considerations are important:

• The benchmark must be appropriate. A global equity fund, for example, often uses the MSCI World Index as a reference.
• The benchmark must align with the investor's risk tolerance. A fund that loses 25 percent while its benchmark loses 30 percent has outperformed the index, but investors must still be comfortable with a 25 percent loss. Many private investors do not know their personal benchmark but are aware of the maximum loss they are willing to accept.

If a benchmark is highly volatile and does not reflect the investor's risk appetite, a fund without strict benchmark constraints may be more suitable. Some actively managed funds focus on loss limitation rather than closely replicating an index. This can be beneficial for risk-averse investors.

Peer group comparison is another useful tool. Rating agencies and fund platforms group similar funds into categories, such as global equity funds or EUR corporate bond funds. A peer group comparison shows how a fund performs relative to comparable products. If a fund generates a return of 8 percent while the peer group averages 5 percent, the fund has delivered above-average results. However, if all comparable funds deliver double-digit returns, the relative performance appears less impressive.

Benchmark and peer group comparisons provide valuable orientation, but risk remains a decisive factor. A fund that outperforms its peers or its benchmark simply because it takes significantly higher risk does not necessarily offer superior value. Evaluating return always requires an assessment of the accompanying risk.

A central question in the discussion about fund returns is whether investors benefit more from active funds or from passive index funds (ETFs). Passive funds replicate a benchmark index and usually offer low costs. Active funds, on the other hand, seek to outperform the market through security selection and active portfolio management, but typically charge higher fees.

In highly efficient markets, such as large equity indices, active managers often face challenges in consistently generating excess returns after costs. In these segments, the low-cost structure of ETFs can be a convincing argument. However, investors should note that an ETF does not guarantee better returns. It simply provides market return minus costs. When the market declines, an ETF declines as well, and there is no manager who can adjust the portfolio or reduce risk exposure.

Active funds have the flexibility to increase cash positions, add lower-risk assets during periods of market volatility or avoid highly valued securities. In contrast, a passive index fund must remain fully invested, regardless of market conditions.

ETFs that replicate broad indices may also be exposed to concentration risks. Although they appear diversified, market-capitalisation weighting can result in significant exposure to a few large companies or dominant sectors. For example, during technology-driven market phases, large technology stocks can represent a substantial portion of major indices. These concentrations may go unnoticed by many investors. Active managers can address such risks by diversifying more broadly or allocating to underrepresented segments.

Bond ETFs face similar limitations. They must replicate the composition of the underlying index. This can lead to higher exposure to highly indebted issuers because such issuers often have a larger volume of outstanding bonds. A flexible bond fund, by contrast, can avoid these concentrations and adjust credit risk more actively.

Another consideration is investor behaviour. ETFs and index funds attract large flows in upward markets and may experience strong outflows during periods of stress. Although such effects can amplify market movements, they have historically been limited. Even during periods of high market volatility, large equity ETFs have generally traded close to net asset value and normalised quickly. These flow dynamics tend to act as a secondary influence rather than the primary driver of market movement.

Active funds can operate more independently from such flows. They can adjust risk allocations, reduce concentrations and respond flexibly in periods of stress.

For investors, the choice between active and passive depends on objectives and preferences. Cost-focused investors with a long investment horizon may benefit from broad, low-cost ETFs. Investors who prioritise risk management, diversification and net performance may find that active funds offer additional value, particularly across changing market environments.

A fund's return should never be evaluated in isolation but always in the proper context. Several factors determine whether a return figure is meaningful.

• Net performance: What matters is the return after costs. Net performance shows the actual value added for the investor. A strong fund delivers solid results after deducting all fees.
• Risk and return together: High returns are only valuable if they are achieved with an appropriate level of risk. Volatility, maximum drawdown and the Sharpe ratio provide the necessary background to assess the quality of returns. A fund with moderate returns and low risk can be superior to a fund with very high returns and extreme fluctuations.
• Long-term consistency: Short-term performance can be misleading. Returns should be evaluated across several years and different market phases. A reliable fund demonstrates resilience in downturns and delivers a stable return and risk profile over five to ten years.
• Meaningful comparisons: Returns should be assessed in relation to a suitable benchmark and an appropriate peer group. Only this allows investors to judge whether a result is truly above average and whether it was achieved under comparable conditions.

In practice, there is no single best fund for all investors. The best fund is the one that matches the investor's risk tolerance, investment horizon and objectives. A high return alone does not determine success. What matters is the overall balance of return, cost structure, risk profile and investment strategy.

Evaluating these factors holistically enables investors to make informed decisions about which funds offer sustainable value. The key to successful investing lies not in chasing the highest percentage return but in understanding the drivers behind the numbers. This approach helps identify the funds that can deliver long-term benefits.

Fund return only becomes meaningful when interpreted within a broader framework: Net performance, risk and return characteristics, investment horizon and benchmark and peer group context. Investors who evaluate returns across multiple market phases and incorporate active risk management considerations can make more robust decisions.

• Equity strategies: Learn more
• Multi asset strategies: Learn more
• Bond strategies: Learn more
• Volatility strategies: Learn more