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Calculating a fund's total return

Q: There has been a great shift of money away from bank certificates of deposit to mutual funds, as investors attempt to get better returns. The typical mutual fund annual report or other fund literature lists the "total return" over one-year, five-year and 10-year periods as an indication _ and selling point _ of how the particular fund is doing.

Are these posted returns comparable to banks' annual percentage yields on CDs? Exactly how, in fact, is a mutual fund's total return calculated?

A: The two things are not comparable.

A bank's annual percentage yield tells you the precise number of dollars and cents $100 will earn if deposited for one year. It takes into account the interest rate, frequency of compounding and some technicalities, such as how many days the bank counts in a year. Strange as it seems, 360 is better than 365 for depositors.

Total return tells you the investment performance of a mutual fund or anything else. It takes into account both yield _ in interest or dividends _ and change in share price.

Here's an example, using a mutual fund in which dividends and capital gains distributions are reinvested to buy additional shares:

Multiply the number of shares now owned by the current net asset value per share. Subtract the original investment from the result. Divide that figure by the original investment and multiply by 100.

In this exercise, we'll say you originally invested $5,000, and the larger number of shares you now own is worth $8,000. Subtract $5,000 from $8,000 and you get $3,000. Divide $3,000 by $5,000 and you get 0.6. Multiply 0.6 by 100 and express the answer as a percentage, 60 percent.

Of course, no mutual fund has ever had that grand a return over a short time period. I used those numbers for ease in arithmetic.

Q: I would like to invest in U.S. Treasury mutual funds. Can these be obtained directly from the Treasury Department?

A: No. Direct sales of U.S. Treasury securities _ bills, notes and bonds _ are made to the public and financial institutions at regularly scheduled auctions. But the Treasury Department is not in the mutual fund business and does not sell fund shares.

You can purchase shares of mutual funds that invest heavily or exclusively in U.S. Treasury securities. There are many such funds, which are considered conservative investments. Just turn to your newspaper's mutual fund table.

Do not buy into a fund just because it holds Treasury securities. Study the prospectus _ a disclosure document _ before putting up any money.

Q: I am in my mid-40s and, for the first time, am making enough money so that I could set aside $50 to $100 a month for future use. While I realize this is not much money, where should I put it to be sure it will be safe and have the best return?

A: One of the first lessons you will have to learn is that "safety" and "best return" are not synonymous.

Because of your limited means, safety should be your prime consideration until you can build some wealth. My recommendation is to put your spare cash into either a bank account with Federal Deposit Insurance Corp. coverage or Series EE U.S. savings bonds. Consider mutual funds later on.

William Doyle welcomes written questions, but will be able to give answers only through the column. Address questions to William Doyle, King Features Syndicate, 235 E 45th St., New York, N.Y. 10017.