[fireburncircuit]

are mutual funds compunding? let say i have 100k and let it settle for about 5 years in a mutual fund, how does it grow and how do you liquidate it?

[nailbiter]

Yes, MFs earn compounding interest. If you had P100K invested, let's assume you entered a fund that consistently performs at 20% annually.

End of year 1: P100,000 * 120% = P120,000
End of year 2: P120,000 * 120% = P144,000
End of year 3: P144,000 * 120% = P172,800
End of year 4: P172,800 * 120% = P207,360
End of year 5: P207,360 * 120% = P248,832

How to liquidate:

You have to redeem your shares. You'll be selling them back to the company at the NAVPS or price on the date you opt to sell. You buy at a certain price and when you're ready, you sell. Some companies allow partial redemption.

Take note that mutual funds are subject to sales load and redemption fees. But most funds, waived na ang exit fee if you redeem after 5 years.

[fireburncircuit]

....so in five years i have P248,832 then lets say the NAVPS at that time is P1. then i will get P248,832 in return?

[nailbiter]

In that example, based on our assumption that you had a P100K investment in a fund that consistently performs at 20% p.a., and assuming your fund would then exempt you from redemption fees, yes.

You can refer to this thread for sales load (entry and exit fee) figures. You can also check the PMT Blog for periodic updates on mutual fund returns.

[fireburncircuit]

so mutual funds are on p.a. basis?

[nailbiter]

Not sure I understand the question. p.a. interest is just computed. Absolute returns for mutual funds are usually annualized when tabulated, so you can easily compare the figures with interest rates.

Again, the annual 20% return we used above is only an example for illustration of compounding interest.

[alkansya]

Yes, MFs earn compounding interest. If you had P100K invested, let's assume you entered a fund that consistently performs at 20% annually.

End of year 1: P100,000 * 120% = P120,000
End of year 2: P120,000 * 120% = P144,000
End of year 3: P144,000 * 120% = P172,800
End of year 4: P172,800 * 120% = P207,360
End of year 5: P207,360 * 120% = P248,832

in my simple mind ang pagkakaintindi ko kasi sa compounding interest, eh yung may pera ako, kumita ng interes tapos habang tumatagal yung interes na kinita ng pera ko, eh kumikita na rin ng interes.   

compounding interest has always been a puzzle to me when it is applied to mf's. pero with this example its quite clear. ( o clear nga ba talaga?  )

ito yung sinasabi nung nakausap ko na isang agent that although your number of shares does not increase, your fund value increases. TAMA? pero to be honest with you, that made sense to me that fund value and number of shares are two distinct entities, pero nalilito pa rin ako as to how they operate.

nailbiter in simpler terms pakilinaw naman.

ibig sabihin ba every year, they reinvest your money and although your number of shares does not increase the fund value increases? (again my question may make sense, but you should see my face while im typing this, litong lito pa rin ako). paano nila nagagawa na hindi nag i increase ang number of shares mo pero napapalaki nila fund value? 

like with your example, my fund value increases every year, so the only way my number of shares will increase is if i top it up or if i redeem; pero if i redeem, (meaning kung mag reredeem ako puwedeng icompute kung ilang shares na ang equivalent ng pera ko at the present navps, which is most likely higher)

but my increase in number of shares is academic kasi wala na rin akong share sa kumpanya; am i making sense?

[alkansya]

....so in five years i have P248,832 then lets say the NAVPS at that time is P1. then i will get P248,832 in return?

In that example, based on our assumption that you had a P100K investment in a fund that consistently performs at 20% p.a., and assuming your fund would then exempt you from redemption fees, yes.

nailbiter follow up question lang, (kahit walang pang sagot yung naunang reply ko), wouldnt it be computed as P1 x # of shares? now since my number of shares is not increasing, how did we arrive at the 248,832? 

there is something wrong i see in my understanding of mf's, i think yun ang reason kung bakit magulo itong compounding interest concept sa akin.

tama ba na yung fund value is always number of shares x navps?  if so,  and your number of shares does not change, papaano exactly ang mechanism that makes mf's behave like its benefitting from compounding navps (kasi nga number of shares remains the same unless nagdividends, pero tulad ng sinabi sa kabilang thread, kahit walang dividends compounding pa rin  :confused:)

my concept kasi of navps is, value at a certain point in time, if you do not avail of it, you lose it, like if you don not redeem, paper gain, pero sa illustration, parang even if you dont redeem, you will still benefit from CUMULATIVE increases in navps

nanawagan po ulit sa mga may sapat na kaalaman at may tiyagang magpaliwanag sa mga engot na gusto lang magpalago ng pera 

[FutureGizmo]

@alkansya, tama ang concept mo na Fund Value is always equal to NAVPS x Total Shares Owned.

Try ko explain using an example.

Assume you have P100,000 and you're thinking of investing in Mutual Fund A whose current (ie., Year 0) NAVPS is P1.00.

Assuming there are no sales loads and no other fees involved, you will be getting 100,000 shares of Mutual Fund A:

P100,000 total investment amount / P1.00 NAVPS = 100,000 shares

You know NAVPS fluctuates daily depending on a number of factors, but assume that at the end of Year 1, Mutual Fund A's NAVPS increased to P2.00. Your "income" after 1 year, then, is:

P2.00 Year 1 NAVPS
1.00 Less: Year 0 NAVPS

P1.00 Increase in NAVPS

In effect, after 1 year you "earned" P1.00 per share of Mutual Fund A

100,000 Total Shares Held
P1.00   Increase in NAVPS

P100,000 Total Income after Year 1

Because you have 100,000 shares of Mutual Fund A, you "earned" a total of P100,000 (100,000 shares x P1 income per share) after Year 1.

Of course, you still have that initial investment of P100,000 so the TOTAL FUND VALUE of your investment is now P200,000.

Note that the FUND VALUE is the one that increased and not the NUMBER OF SHARES held.

Here I referred to income as "income" and earned as "earned" because this "profit" is actually just a PAPER PROFIT. This means the gain has not been REALIZED yet. The only way to realize a gain from mutual funds is to redeem the shares.


Let's extend the example to Year 2. Assume that at the end of Year 2, the NAVPS of Mutual Fund A fell to P0.50. Let's review first:

1. How many shares again of Mutual Fund A do you have? 100,000 shares.

2. At what price did you buy these shares? P1.00 per share

3. How much is the total value of these shares at the end of Year 1? P200,000.

4. How much was the NAVPS of those shares at the end of Year 1? P2.00 per share.

5. At the end of Year 2, what are the only things you should be concerned about? #1 and #2.

At the end of Year 2, the total investment value (#3) and the NAVPS of Year 1 (#4) DON'T MATTER anymore. Don't forget that.

Here's how to compute the gain (or loss) for Year 2:

P0.50  Year 2 NAVPS
P1.00  Year 0 NAVPS (NAVPS when you bought the shares)

P0.50  Decrease (Loss) in NAVPS

Simply speaking, the shares which you initially bought at P1.00 per share are now valued at just P0.50. In effect, you "lost" P0.50 per share.

What's the total "loss"?

100,000 Total Shares Held
P0.50   Loss per Share

P50,000  Total Loss

Because this is a "loss", this should not be added but rather, deducted from your P100,000 initial investment. Thus, the TOTAL FUND VALUE of your investment is now just P50,000.

Fortunately, this is another PAPER LOSS because it is not an ACTUAL LOSS. You will only incur this loss if you decide to redeem the shares.

=====

There's a shortcut method to determine whether you are gaining or losing and by how much, but I'll save that for later. Or probably another poster will just post it here.

[nailbiter]

I'll rework the example. Dapat nga we considered NAVPS instead of fund value.

Let's say you bought 100,000 shares when NAVPS was P1.00. Your initial fund value would be P100,000.

100,000 shares at P1.00 each = P100,000

Again, assuming a consistent performance of 20% each year, NAVPS will increase as follows (figures rounded up to nearest 10ths):

End of year 1: P1.00 * 120% = P1.20
End of year 2: P1.20 * 120% = P1.44
End of year 3: P1.44 * 120% = P1.73
End of year 4: P1.73 * 120% = P2.08
End of year 5: P2.08 * 120% = P2.50

So at the end of year 5:

100,000 shares at P2.50 each = P250,000

Paper gain pa lang yan. But when the NAVPS is at P2.50, that's the fund value of your shares. You can thus monitor the value of your shares according to the daily NAVPS. On the day you redeem, that's when you'll realize any gain/loss on your shares.

ibig sabihin ba every year, they reinvest your money and although your number of shares does not increase the fund value increases? (again my question may make sense, but you should see my face while im typing this, litong lito pa rin ako). paano nila nagagawa na hindi nag i increase ang number of shares mo pero napapalaki nila fund value? 

like with your example, my fund value increases every year, so the only way my number of shares will increase is if i top it up or if i redeem; pero if i redeem, (meaning kung mag reredeem ako puwedeng icompute kung ilang shares na ang equivalent ng pera ko at the present navps, which is most likely higher)

but my increase in number of shares is academic kasi wala na rin akong share sa kumpanya; am i making sense?

Yes, the money is always earning/invested. It is a pooled fund that's being moved around the market. The net value of the total assets of the mutual fund is divided by the number of shares owned by its members to arrive at the daily NAVPS. Any gains or losses are shared by the members of the fund, and this is expressed by the movements of the NAVPS.

Your number of shares will increase if you top it up or if the fund declares dividends that will be paid out as additional shares.

Your shares don't increase when you redeem. When you redeem, you're giving up/selling back those shares.

[fireburncircuit]

if i redeem the fund after 5 years will the navps be @P2.50 or the current value of the navps at the time i redeem it? (based from our example)

[nailbiter]

NAVPS fluctuates daily, fireburncircuit. So yung NAVPS sa araw kung kailan ka mag-redeem, yon ang susundin.

[fireburncircuit]

i'm confused, if your shares don't grow how will you earn?

[nailbiter]

Your number of shares don't increase over time, fireburncircuit. It's the value of the shares that changes. If you want more shares, you buy more shares.

An asset like jewelry, for example, its value could appreciate or depreciate depending on the price of precious metals or precious stones in the market. The value of your shares would also change depending on the value of the total assets of the mutual fund.

Going back to our example, you bought one share at P1.00. Over five years, the value of that share has increased. At the end of those five years, that one share you have could be sold for P2.50, so you would have earned P1.50 over your purchase price.

[FutureGizmo]

Ayan, libreng finance lessons na yan ha? Dapat may bayad ito

Yung shortcut method ng pag-compute ng MF earnings (or loss):

1. Determine how many shares you own. (e.g., In the example above = 100,000 shares)
2. Determine the price in which you bought the shares (NAVPS). (e.g., P1.00 per share)
3. Determine the current NAVPS. (e.g., Let's use nailbiter's example, End of Year 5 = P2.50)
4. Determine the change in NAVPS. (P2.50 current NAVPS - P1.00 original NAVPS = P1.50 increase in NAVPS)
5. Multiply the change in NAVPS with the total shares you own. (P1.50 x 100,000 shares = P150,000)
6. The resulting amount (in the example, P150,000) is the total income. (This is a loss if current NAVPS < original NAVPS)