MF NAV & Units?

Question

Say I bought MF of ABC with below details:

NAV Rs.10

No of Units 100

After few days Say I bought some more MF of ABC with below details:

NAV Rs.12

No of Units 100

Now on some day, if the NAV becomes Rs.11, then if I redeem 100 Units, will it get redeemed from the first set of 100 units or does it get averaged?

Will I get a profit of Rs.100? or a Loss?

Please help me understand.

Thanks.

Answer 1

I think you should think of this from a different perspective. A better way of looking at your returns would be to consider the rate of return on your total investment rather than the purchase and sale of units at different time periods. This is because your example fails to consider time value of your investment.

The profit/loss in your investment is affected by the time period between the purchase and sale of the MF units. It also depends on the prevailing interest rates.

However, in absence of those important variables, "one" way of valuing your return on investment would be to consider the growth (or decline) in value per time period. This is also known as Holding Period Return

In your example,

The return on investment between the first and second purchase is (12-10)/10 = 20%

The return between second and third period is

(11-12)/12 = -8.33%

The return on your initial investment is [(1.20)(0.9167)]^0.5

= 4.176%

You can find more information on this method at

http://en.wikipedia.org/wiki/Holding_per...

I would steer away from calculating numeric values from different time periods. This is because, theoretically, 100 Rs. is not equal to 100 Rs in the future. = Time Value of Money.