What is Gross Rate of Return
Gross rate of return is the total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted over a specific period of time, such as a month, quarter or year.
BREAKING DOWN Gross Rate of Return
The gross rate of return on an investment is one measure of an investor’s profit. It typically includes capital gains and any income received from the investment.
A simple calculation of gross return can be derived from the following equation:
Gross Rate of Return = (Final Value – Initial Value) / Initial Value
For comparison, the net rate of return deducts fees and expenses from the investment’s final value:
Net Rate of Return = (Final Value after Deducting Fees and Expenses – Initial Value) / Initial Value
The gross rate of return can be substantially different than the net rate of return which deducts fees and expenses. For example, the gross return realized on a mutual fund that charges a 5.75% sales charge will be very different than the net return realized after the charge has been deducted. Details on how an investment company calculates return are often included in the fund’s prospectus. The gross rate of return is often quoted as the rate of return on an investment in fund marketing materials. Returns for more than a year are often annualized which provides the geometric average return of an investment for each year over a given time period.
Investors often use return calculations when considering a new investment or assessing the performance of an investment. Net return is typically not as easily identified as gross return. Therefore, in determining how the expenses affect the return of the fund, investors often turn to the expense ratio. The expense ratio is a fund characteristic that represents the percentage of fund assets paid for expenses. It is often used in conjunction with a fund’s total return and benchmark return for comparison of the fund’s performance.
The marketing fact sheet from one of the market’s top large cap funds, the Quantified STF Fund, provides an example of how returns and expenses are expressed.
Quantified STF Fund – This fund reports a gross rate of return. It also provides a breakdown of the Fund’s expenses which result in an expense ratio of 1.72%.
In investment management, the CFA Institute's Global Investment Performance Standards (GIPS) govern the calculation and reporting of returns. Investors can rely on the GIPS return standards for comparing investment return characteristics across the industry.