Understanding how mutual funds work is
very important if you are planning to invest in them. Unlike the stock market
which fluctuates through the day, a pricing for a fund is decided only one a
day and that is typically done at the end of business hours. Calculating your
return on investment is very important and is quite simple to do too. The ROI should
be calculated for a specific time period and would be the total increase in
capital divided by the total investment made. This percentage would give you
the best idea of how well your investment is doing.
There are different methods of
calculating the profit that you have made on your investment also. Different
formats are taken by different investors but the simplest two ways are to break
it down by an absolute return method or by a total return in fund.
In the absolute return method, you most
important dates are the date of investing and the date of exiting the fund. You
can calculate the absolute return by dividing the total chance in the NAV
during period of investment and the NAV that was present at the start of your
investment. With this you are easily able to figure out the return and you can
use this on any kind of mutual fund. So, this is how the absolute return is
calculated using - (NAV(end) - NAV(start))/NAV(start).
The other way to use a mutual fund calculator is by
calculating the total return that is obtained from the fund. In this method,
you include the dividends that you have received too. So add the dividends in
the holding period and then remove the total change in the NAV. Finally divide this
with the initial NAV when you purchased the fund. This can be calculated with -
{Dividends +[NAV(end) - NAV(start)]}/NAV(start).
With these calculators, you would be able
to plan your investment and know how close to your target you’ve reached.
