Page 99 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Important Aspects of Mutual Funds

(i) Net Asset Value (NAV)
NAV is calculated as follows:
Fair market value of Scheme's Investments + Receivables +
Accrued income + Other assets – Accrued expenses –
Payables – Other liabilities
NAV=
Number of units outstanding
(ii) Entry Load and Exit Load
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time
one buys or sells units in the fund, a charge will be payable. This charge is used by the
mutual fund for marketing and distribution expenses.
Calculation of Front-end Load of Entry Load
Net Asset Value
Public Offer Price =
1 – Front-end Load
Calculation of Back-end Load or Exit Load

Net Asset Value
Redemption Price =
(1 – Back-end Load)
(iii) Return on Investment
The investor who invests in mutual fund units can receive returns in the following two
ways:

Capital Appreciation – Profit earned on sale of units at a higher NAV than the original
cost.
Income Distribution – When a fund makes a profit on its investment, this profit will be
given to investor as a dividend which can be re-invested in the fund or retain it in the form
of cash.

Return on Mutual Fund
(NAV – NAV )+ 1 + G t
t
t
t-1
r =
NAV t-1
Where
r = Return on mutual fund
NAV = Net asset value at the time period ‘t’
t
NAV = Net asset value at time period “t-1”
t–1
1 = Income at time period ‘t’
t
G = Capital gain distribution at time period ‘t’
t
Required Return on Mutual Fund Investment (as a percentage)
⎡ 1 ⎤
R = ⎢ × R 1 ⎥ + Recurring expenses (%)
2 ⎣ 1– Initial expenses(%) ⎦

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