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How to compute your income in Mutual Funds




A lot of people invested in Mutual Funds are still at a loss regarding how their earnings from Mutual Funds are actually computed. Since this is the case, we’ll help shed light on how this is done in this short and simple discussion.

You’ll find below a step-by-step guide on how you yourself can personally compute the gains (or losses) of your Mutual Fund investment.

Step 1: Determine the number of shares you own

When you invest in mutual funds, you are actually buying “shares” of the mutual fund company. (Learn more about it here: Introduction to Mutual Funds)

The price you pay is equal to the NAVPS or the Net Asset Value per Share, a figure that changes every day since it represents the “market value” of all investments owned by the mutual fund company.

Let’s assume you wish to invest P100,000 in a Mutual Fund. You checked and saw that the mutual fund’s NAVPS price is currently P1.75.

Given this NAVPS value, if you invest P100,000 you will receive 57,142 shares of this mutual fund, computed as follows:

  • P100,000 divided by P1.75 = 57,142 shares

Your total investment value that day is P99,998.50, computed as follows:

  • 57,142 shares x P1.75 NAVPS = P99,998.50

Does this mean the entire P100,000 is not fully invested? You’re correct, and you actually will get a change of P1.50 from the company. (Some companies, though, will just give you a fraction of the shares valued at P1.50 so that they will no longer have to give you back the P1.50 change. We will not consider that, however, in this example.)

For simplicity purposes, we will also 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 front-end sales load) or when redeeming your mutual fund shares (exit fee or back-end sales load).

Step 2: Determine the current NAVPS

At any day, you can compute the value of your mutual fund investment. The only two things you need to know 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.

To calculate the profit, here’s what you simply have to do:

Get the difference between the current NAVPS and the NAVPS when you originally bought the shares. Then 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 when you bought the shares = P1.75
  • Difference in NAVPS prices = P2.50 – P1.75 = P0.75
  • Number of Shares you Own = 57,142 (from Step 1 above)
  • Profit = Difference in NAVPS price x Number of Shares you Own
  • So your Total Profit = P0.75 x 57,142 = P42,856.50

This means your P100,000 investment has already produced you a profit of P42,856.50. Not bad!

Alternatively, you can just compare the current total fund value and the initial fund value. The “current total fund value” is the product of (i.e., multiply) the number of shares you own and the current NAVPS price. The “initial fund value,” meanwhile, is the product of (i.e., multiply) the number of shares you own and the original NAVPS price.

Mathematically:

  • Current fund value = 57,142 shares x P2.50 NAVPS = P142,855.00
  • Beginning fund value = 57,142 shares x P1.75 NAVPS = P99,998.50
  • Difference in fund values = Total Profit =P142,855.00 – P99,998.50 = P42,856.50

As you can see, this computation produces the same amount of profit we computed using the other formula above.

One important 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 could still change which means your fund value (and profit) will also change. And when that happens, whatever “paper profit” you have computed become irrelevant.

We’ll show this in the next example.

Step 3: Calculate actual profit at time of redemption

Let’s assume it’s now the 2nd year and you wanted to encash and redeem your shares.

Before we proceed, we’ll highlight again that the fund value and your profits at the end of Year 1 are now irrelevant. Yup, they are NOT important anymore at this point. Whatever “profit” you have previously gained was not “realized” since you did not redeem the shares.

Let’s 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 mutual fund investment has earned profits of P14,285.50.

If you redeemed all 57,142 shares, you will 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 totals P114,284.00.

The total cash proceeds, which you’ll receive upon redemption, 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 may be reduced by any exit fees or back-end sales loads charged by the mutual fund.

We hope this gives you an idea how to compute your mutual fund income. Happy investing!

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48 thoughts on “How to compute your income in Mutual Funds”

  1. lynlyn says:

    hi,
    does the shares can anytime to liquidate it?
    thanks. can some one help me for this. cause it makes me confuse regarding the example.
    parang ang dapat eh, once you sold na ung share mo at high value iwithdraw na bago pa bumaba ung cost per share. then buy ulit kapag mababa na ung value??

  2. Nharda says:

    is this computation also applicable sa VUL products? i hope may mag feedback regarding on this..

  3. mikantonio says:

    I think what I’d like to know is if my shares will gain/lose new shares depending on the fund performance or not. Or would I only have additional shares when I have subsequent investment? If it does not earn shares, there’s really no point in minding for the navps along the way, just when you think I’m ready to redeem, all I need to do is add more money to buy more share then hope that the company grows so navps also grows. Am I interpreting it right?

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