Home / Investing in Mutual Funds / How to compute your earnings in Mutual Funds

 
Stocks, Mutual Funds, Forex, Finance Philippines

A lot of people invested in Mutual Funds are still at a loss regarding how their income from this investment is computed. We’ll try to simplify how it’s being done in this discussion.

Step 1: Determine how many shares you own

Calculating income from Mutual Fund investments

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

Your total fund value that day is:

  • 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.

Stocks, Mutual Funds, Forex, Finance Philippines

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:

  1. Number of shares you own
  2. 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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  • Pam

    I have a few Qs:

    When is the best time to invest in mutual funds?
    How do you select one?
    Can you redeem any time?

    Thanks in advance for the clarification.

  • lance

    I have the same question

    When is the best time to invest in mutual funds?
    How do you select one?
    Can you redeem any time?
    Is it risk-free to invest in Mutual Fund?

    Thanks!

    • Marco Antonio

      Hi!

      There is no “best time” to place investment  and to exist in Mutual Fund.  It depends with your objective (long term and short term).Try to read the concept about Peso Cost Averaging this will help you in determining the length of time to invest.  Selecting type is MF can be answered by determining what type of investor you are (aggressive, moderately aggressive, conservative and so on…).  MF has a holding period, but you can redeem anytime but you early redemption fee.  All types of investment portfolio has a  risk, but learn how to manage the risk :)
        

  • buloid (francis.f.valencia@fami.com.ph

    When is the best time to invest in mutual funds?
    How do you select one?
    Can you redeem any time?
    Is it risk-free to invest in Mutual Fund?

    ———————

    1. To put it bluntly, there really is no “best” time to invest in a mutual fund. Since these are handled and monitored by fund managers on a full time basis, their buying, selling, and portfolio decisions will always be for the betterment of the shareholders. While others may argue that the “better” time would be to enter the market is low or going down, another may argue that “how will you know that the market will not go down the next day? or the day after?”

    One strategy that you can use if timing is a big concern would be to cost average. Quoting wikipedia:

    Dollar cost averaging is a timing strategy of investing equal dollar amounts regularly and periodically over specific time periods (such as $100 monthly) in a particular investment or portfolio. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.

    By using cost averaging, you can eliminate the timing element in investing in mutual funds. You’ll be in the market when it goes up and when the market goes down, balancing any losses you could have incurred with gains in other placements.

    Whats important is to get your money working right away. Don’t try and predict the market because if you keep waiting for that “perfect” or “best” time to place, it may or may not come at all and your investment could’ve already been earning should you have just invested it earlier. In other words, anytime is a “good” time to invest in a mutual fund!

    2. In order to select a mutual fund that suits you, assess your investment objective, time horizon and risk profile. “Am I conservative? Am I open to exposing myself to stocks? Is this money for my retirement? My child’s college fund? My future dream home?” These, along with others, are good tip-of-the-iceberg questions that can aid you in determining the ideal fund — or funds — for you.

    Each mutual fund has its own investment restrictions and portfolio composition. A bond fund, for example, generally invests in government bonds and other fixed income instruments, whereas an equity will have exposure in stocks.

    While it’s logical that a conservative fits with a bond fund while an aggressive investor will fit into an equity fund, you should never discount the fact mutual funds are managed assets: ie, investments in your portfolio that someone else is monitoring for you. You can break your investable funds down to diversify your investments and try out more than one mutual fund. Since mutual funds generally have low initial investment amounts, a conservative investor can try out an equity fund without sacrificing too much of their placements in bond funds.

    In short, mutual funds have their own profiles or “identities” but that doesn’t mean clients should limit themselves to focusing on just one fund. Diversify!

    3. Mutual funds can only invest in marketable securities, or investments that can easily be liquidated in the market. By law, they are required to be able to liquidate your investment should you wish to “redeem” or withdraw it.

    Most funds charge an exit fee, however, for redemptions. Please check with each fund’s respective prospectus or fund managers for a schedule of such fees and its terms and conditions on check releasing and disbursements.

    4. Mutual funds are not risk free investments. They are subject to the risks that their underlying invesments (or the securities that they invest in) are subjected to in the market. It is by this nature that their returns and yields cannot be guaranteed as well, as a mutual fund can perform positively or negatively depending on its fund management and market conditions.

    Please note that the terms used to describe a fund’s performance were “yield” and “rate of return.” A mutual fund should not and cannot use the term “interest” to describe its performance as it connotes a positive rate of return.

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  • Chindilindi

    in that case, why is people telling us to invest long term when in fact on the 2nd or succeeding year, you MAY get it lesser? does this mean you need to be always on the look out to check if the price has been down so low? They said invest long term so that you will beat the loss and gains in every year that passes by, but in your example you said that the previous year’s price is not relevant anymore. Please clarify

    • Chindilindi

      still no answer to my question :(

    • letty

      Hello,

      There is no real defined length of time on keeping your investments that has been proven successful all the time.  The mutual fund prices move up or down depending generally on the bond/stock market movements and other economic factors whether globally or locally so yes, you can invest now at a price of say Php2 per share and that price can increase or decrease in the next two years.  The length of time you need to keep your investments depends on your investor profile – are you a value investor meaning you want to keep your investments for a longer term on the expectation that the value of the investments will go up; how much losses are you willing to take – can you wait till next next year to exit a losing investment upon its recovery? Or are you just a buy and sell type of investor who buys when the prices are low and sells when a target gain has been reached.  You should look at these investments as a legalized form of gambling meaning you can win or lose some or all depending on market forces and yes, you need to monitor the price per share on a regular basis to ensure that you are aware if your investment is losing or not. Hope this helps.

    • Marco Antonio

      try to read about Peso Cost Averaging, this might help you understand to what is the best strategy in the length of time of investment :)

    • PnoyFinancialCheckup

      First and foremost, dont confuse the example with practical strategies being use for mutual fund.

      The sample computation is for one time investment only, just to show the straight way to get your profit in MF investment IF and ONLY IF you have invested one time.

      Second, why are people investing in MF are encourage to stay long term? Go back to the fundamentals of the companies inside the fund itself. Let us say in FAMI , they have PLDT in their portfolio. Would you think PLDT as a company wanna close their telecoms business in just few years? I dont think so? They will surely strive to enlarge their business operations and give profit back to its shareholder including its investors. Same goes with other companies in the current portfolio of the fund, they wanna stay longer in business.

      Third, when entering MF , you should use constant peso averaging to buy shares at any given time. This way you minimize the risk of capital being wipe out vs. doing a one time big time investments.