The fund is a collection of contributions from various investors, who may come from different backgrounds (individual, collective, or institutional; private or state) but who share the same profitability and risk objectives in relation to the investments they make, entrusting its management to a team of experts in the field.
The investment unit of a fund is called a share, and investors are called unitholders. If you want to invest in a mutual fund, you have to buy shares; this act is called subscription. If you want to get rid of your investment, you have to sell your shares; this is called redemption.
A company, called a management company, is the one that manages all the administrative and accounting tasks and also decides where to invest.
Another institution, called the depository, holds the securities and cash that represent the assets of the investment fund.
How can we know the level of profitability of a fund?
The price, or market value, of each share is calculated daily by dividing the total assets by the total number of shares outstanding at that time. This is known as the net asset value. It fluctuates according to the performance of the securities comprising the assets, such as stocks, bonds, etc. To find the net asset value of any investment fund, you can look it up on the management company’s website or in stock exchange bulletins. It is also often published in the press and other financial media.
Now, the return that you, as a participating investor, achieve from an investment fund is calculated as the percentage change in the net asset value given between the purchase date (subscription) and the sale date (redemption), and can be either positive or negative.
Profitability = (Final Net Asset Value – Initial Net Asset Value) / Initial Net Asset Value X 100
Let’s look at an example: You invest $20,000, subscribing to 100 shares of a fund whose net asset value at that time is $200 (that is, each share costs $200)
After three years, he redeems his shares. At that point, their net asset value is $260 (for each share he sells, he receives $260, or a total of $26,000).
Its profitability has been: (26,000 – 20,000) / 20,000 X 100 = 30%
Although in the previous model we obtained a positive return, it may happen that the financial investments do not yield positively, for example, if at the time of reimbursement the net asset value is $188 dollars, its profitability would be: (18,800 – 20,000) / 20,000 X 100 = -6%
This calculation gives the return over a period determined by the subscription and redemption dates, but which may not necessarily coincide with a year. To compare this return with that of other products typically expressed in terms of annual interest, we must annualize the return. In this case, the 30% and -6% obtained over three years would be equivalent to an annual return of 10% and -2%, respectively.
It’s easy to deduce that a fund’s assets can increase or decrease for two reasons: the inflow or outflow of participants, i.e., subscriptions and redemptions, which increase or decrease the number of outstanding shares. And the market price of the securities comprising the assets. It is this second factor that determines the profitability of the fund and, consequently, of each participant.
Management and deposit fees
For financial management services for their investments, investment fund participants pay management and deposit fees, which are charged directly to the fund and deducted from the net asset value, thereby reducing the return obtained. Additionally, there may be fees for the subscription and/or redemption of shares, which also reduce the return.
Management and deposit fees vary depending on the investment fund, within the maximum limits set by law in each country. Since they can affect profitability levels, it’s important to understand them before choosing one fund or another.
