When you invest in mutual funds, you
are actually buying “shares” of the mutual fund company. (See Introduction to Mutual Funds) The price you pay is the NAVPS or
the Net Asset Value per Share, a figure that changes every day since it
represents the market values of the investment assets the mutual fund company
owns.
Let’s assume you want to invest
P100,000. When you checked with the mutual fund, the NAVPS price is P1.75. The
number of shares you will then get is:
- P100,000 divided by P1.75 = 57,142 shares
- 57,142 shares x P1.75 NAVPS = P99,998.50
Since you paid P100,000 but the
amount of the shares you bought is only P99,998.50, the company would actually
return P1.50 to you.
For simplicity purposes, we did not
consider any fees or sales loads charged by the fund. Do note, though, that
most funds will charge a fee either upon investment (entry fee) or when
redeeming your mutual fund shares (exit fee). We’ll defer computations
including fees in a succeeding article.
Step 2: Determine the
current NAVPS
At any day, you can compute the
value of your mutual fund investment. The only two things relevant to you are:
- Number of shares you own
- NAVPS price on that day
Let’s assume that at the end of 1
year, the NAVPS of your mutual fund is P2.50. Your profit is simply the
difference between the current NAVPS and the NAVPS when you bought your shares.
Multiply this with the number of shares you own and you’ll get the amount of
your profit.
Mathematically:
- Current NAVPS = P2.50
- Original NAVPS = P1.75
- Difference in NAVPS prices = P2.50 – P1.75 = P0.75
- Number of Shares Owned = 57,142
- Profit = P0.75 x 57,142 = P42,856.50
This same amount can also be
computed by comparing the current total fund value and initial fund value.:
- Beginning fund value = 57,142 shares x P1.75 NAVPS =
P99,998.50
- Current fund value = 57,142 shares x P2.50 NAVPS =
P142,855.00
- Difference in fund values = Profit = P42,856.50
One major point to remember, though.
This profit is still “paper profit” or “unrealized income.” That’s because you
have not redeemed the shares yet. Any day afterwards, the NAVPS will still
change which means your fund value and profit will also change.
We’ll show this in the next example.
Step 3: Calculate
actual profit at time of redemption
Let’s assume you wanted to encash
and redeem your shares at the end of the 2nd year. Before we proceed, you need
to know that the fund value and NAVPS price at the end of Year 1 are now
irrelevant. Whatever “profit” you gained before was not realized since you did
not redeem the shares.
Assume that at the end of Year 2,
the NAVPS price is P2.00. As in Step 2, we can compute the profit by comparing
the current and original NAVPS:
- Current NAVPS = P2.00
- Original NAVPS = P1.75
- Difference in NAVPS prices = P2.00 – P1.75 = P0.25
- Number of Shares Owned = 57,142
- Profit = P0.25 x 57,142 = P14,285.50
At the end of Year 2, your total
investment earned P14,285.50. If you redeemed all 57,142 shares, you can now
actually earn and get P14,285.50 cash as profit.
The total money you would get from
the mutual fund is this profit plus the original investment (P14,285.50 +
P99,998.50), which can also be computed this way:
- Current NAVPS = P2.00
- Number of Shares Owned = 57,142
- Total Fund Value = P2.00 x 57,142 = P114,284.00
Again, be reminded that this
computation does not consider any fees charged by the fund. Your fund value
will be reduced by those fees.
In any case, we hope this gives you
an idea how to compute your mutual fund income.
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