What Does Yield Represent in a Mutual Fund?

When you invest in a mutual fund, you want to make money. You can make that money as either income or growth. Growth means the value of your mutual fund shares goes up. Income means you get paid dividends or interest on your investment. "Yield" refers to your dividends or interest, but it can be larger than the expected yield a mutual fund publishes in its prospectus.

Interest Yield

If you invest in a bond mutual fund, the fund will list the average interest it earns on all of its bonds. You will find this figure in the fund's prospectus, a document that tells you the investments the fund currently holds and what kind of investments it plans to buy in the future. You will find a figure for the current yield. This is the average of all the interest rates bonds in the fund pay.

Dividend Yield

Some mutual funds invest in stocks that pay dividends. The companies that issue the stocks pay a dividend, usually quarterly, to shareholders. When you review the fund's figures in the prospectus that indicate the current yield of the fund, you are looking at the average of all the dividends the fund receives.

Effective Yield

Mutual funds that buy bonds may buy them at a discount. If the fund holds those bond until they mature, it will get not only the interest payments, but the "par" value, which the issuing organization set when the bond was new. The discount price was below the par value, so the fund will get the discount amount back when the bond gets paid in full at maturity. The discount plus the interest rate is called the effective yield. This means if you invest in a fund that buys bonds at discount, you could get a higher effective yield than the interest rate yield the mutual fund lists for its bonds.

Return vs. Yield

You can read in the prospectus about a fund's return. The word "return" refers to the interest the fund receives plus the rise in price of the fund's shares. Shares rise in price when the investment a fund holds go up, because investors are willing to pay more for those shares. You get the benefit of the rise in price plus the interest you earn, and this is called your return. The term "return" always indicates past performance, not future performance. If you read that a fund has a 10 percent return this year, that means so far it has made 10 percent for investors when you combine share price appreciation with interest earned.