How to compute your earnings in Mutual Funds (MF)

How to compute your earnings in Mutual Funds (MF)

A lot of people invested in Mutual Funds (MF) or in Unit Investment Trust Funds (UITF) 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

When you invest in mutual funds, you are actually buying “shares” of the mutual fund company. In the banks you are buying "units" of the Unit Investment Trust Funds (UITF). 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 Php 100,000. When you checked with the mutual fund, the NAVPS price is Php 1.75. The number of shares you will then get is:

• P100,000 divided by Php 1.75 = 57,142 shares

Your total fund value that day is:

• 57,142 shares x Php 1.75 NAVPS = P99,998.50

Since you paid Php 100,000 but the amount of the shares you bought is only Php 99,998.50, the company would actually return Php 1.50 to you.

For simplicity purposes, we did not consider and include 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).

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 Php 2.50. Your profit is simply the difference between the current NAVPS and the NAVPS when last time 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 = Php 2.50
• Original NAVPS = Php 1.75
• Difference in NAVPS prices = Php 2.50 – Php 1.75 = Php 0.75
• Number of Shares Owned = 57,142
• Profit = Php 0.75 x 57,142 = Php 42,856.50

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 Php 1.75 NAVPS = Php 99,998.50
• Current fund value = 57,142 shares x Php 2.50 NAVPS = Php 142,855.00
• Difference in fund values = Php 142,855.00 - Php 99,998.50 = Profit = Php 42,856.50

One major point to remember, though. This profit is still “paper profit” or “unrealized income.” That’s because you have not redeemed or cash out 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 or cash out

Let’s assume you wanted to cash out 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 or cash out the shares. 

Assuming that at the end of Year 2, the NAVPS price is goes down to Php 2.00. As done in Step 2, we can compute the profit by comparing the current and original NAVPS:

• Current NAVPS = Php 2.00
• Original NAVPS = Php 1.75
• Difference in NAVPS prices = Php 2.00 – Php 1.75 = Php 0.25
• Number of Shares Owned = 57,142
• Profit = Php 0.25 x 57,142 = Php 14,285.50

At the end of Year 2, your total investment earned Php 14,285.50. If you redeemed or cash out all 57,142 shares, you can now actually earned and get Php 14,285.50 cash as profit.

The total money you would get from the mutual fund is your profit plus the original investment (Php 14,285.50 + Php 99,998.50), which can also be computed this way:

• Current NAVPS = Php 2.00
• Number of Shares Owned = 57,142
• Total Fund Value = Php 2.00 x 57,142 = Php 114,284.00

Again, be reminded that this computation does not consider any fees charged by the fund. Your fund value will be reduced by those fees. Also, this computation can apply or same in the Unit Investment Trust Fund offered by banks. See the difference between Mutual Funds (MF) and Unit Investment Trust Funds (UITF). 

Anyway, I hope this gives you an idea how to compute your mutual funds (MF)or Unit Investment Trust Funds (UITF) income. Check also my Portfolio for sample.