How Earnings are Computed in Mutual Funds

So do you think Mutual fund is the right investment for you? If this is where you want to place your hard earned money, you need to understand how it works and how exactly you will earn from it. This section will explain how.

Step 1: Find out the total number of shares you own.

Investing in mutual fund is the same as buying “shares” or partial ownership of the mutual fund company. The amount of money that you will pay/invest is called the Net Asset Value per Share or NAVPS. This figure changes every day since it represents the market values of the investment assets the mutual fund company owns. 

Check from the Mutual Fund Company and determine the current price of NAVPS, for example the value of NAVPS is P1.75.

Assuming you have P100,000 to invest. 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.

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).


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, I hope this gives you an idea how to compute your mutual fund income.