Average annual total return
The average annual total return is the historical return of a mutual fund expressed as a percentage. The average annual return can show a three-year return, 5-year return, 10-year return or longer, depending on the available data (i.e. fund age). For the average annual total return it should reflect all the data from the inception of the fund (i.e. a 20-year average annual return will be reported for a 20 year old fund).
The average annual total return is very useful in choosing a mutual fund to invest in since it will show you how the much the fund has grown from inception. However, a fund that has a really nice average annual total return does not necessarily indicate a healthy fund because the trend can be downwards in the recent years but still reflect a positive total average return. This is possible because the previous years could offset the recent negative trend.
For example, if the average annual total return for a 10-year old fund is 25%, then on the outset it would surely be attractive to invest in that mutual fund. If you look further, it might be 25% because the first 5 years had a good run averaging at 40% per year but the last 5 years the yearly return has been going downhill at 30%, 20%, 10%, 0, and -10%. Obviously if you average the returns for the last 10 years, it will still reflect as 25% but it wouldn’t be wise to invest now due to the downward trend.