The biggest joy that a lot of investors get is when they take a look at their mutual fund investments and then see the growth in its Net Asset Value (NAV). It translates into a rise in the value of the investment for them and hence they would feel happy to see that their investment has worked out well. A completely reverse thing happens when there is a reduction in the value and the investor sees that this is not what they had expected. In many situations the individual is looking at the value after a certain period of time so they do not even know what has happened in the interim period that has affected the values. There are often some false alarms that are raised and this can lead to a completely different decision from what should actually be done so this needs to be considered carefully.
Looking at value
The easiest way in which an investor can actually look at the value of their investment is to consider the account statement that is present for their fund. This will list out the various details of their holdings and it will mention the number of units plus the other details that come along with the investment. There is also a place where the details of the total cost of the investor are mentioned along with the latest value based on the NAV of the fund which will give the current valuation. This is the amount (reduced by any applicable existing load) that the investor will get if they sell off their units immediately and hence this is the important figure that has to be considered when they are looking to make various decisions.
One of the biggest shocks that investors face is when they see that the current value of their investments is actually less than the cost price. This is especially shocking when this deals with some long term investments where they had been expecting the value to actually rise in the interim period. However the silver lining is that in all cases it might not be a situation where the fund has performed worse than expected but it could be that there is a misunderstanding of the whole situation because of the way in which the mutual fund shows the information.
Investors expect that the information that is provided in the account statement actually means what it says. This means that when there is a case where the investment side is showing a figure of Rs 1,90,000 and the total value of the investment currently is Rs 1,80,000 then they believe that they are losing a sum of Rs 10,000. This would be the case if the investor has actually invested the initial amount and this value has decreased to the level that is being shown but in many cases this is not the case as it consists of a calculation by the mutual fund. What is actually happening in this situation is that the investors fail to understand the manner in which the fund is calculating the different figures that is mentioned on the account statement.
The main thing is to look at the option that has been chosen by the investor because this will give an idea about the investment and the manner of the calculation of the cost price and other details. If there is a growth option that is chosen then there would not be any problem because the cost price would be represented by the amount that has been invested and this has to be higher than the current value if there has to be some gain for the investor. One thing to look at is how the fund accounts for the amount that has been withdrawn so for example if the original investment is Rs 10,000 and half of this has been withdrawn then the cost should now show Rs 5,000 and this has to be compared with the current value to see how the investor is faring.
When the option is a dividend payout then the cost and the current value are important figures but they will not give the complete and correct picture to the investor unless the dividend paid is also considered. This will happen because there is an amount that the investor is taking out of the fund due to the dividend that has been paid and this should be added to the current value to get an idea of the total earnings that have been made and hence this consolidated figure will be the one that should be used to arrive at any decision.
The real confusion arises in the case the investor has chosen the option of dividend reinvestment as this will need very careful attention to see what is actually happening. In this option there is a dividend that is actually received by the investor but instead of this coming to them in the form of cash this is actually converted into additional units and the amount gets reinvested into the existing fund. Here the investor will be earning dividends but it is reflected in their accounts in the form of a higher number of units that they actually hold.
The investor has to be very careful when this kind of situation is witnessed because the funds will account for this in a way in which they could find themselves looking at a loss on paper. The fund will consider the initial amount that has been invested in the fund as the cost price and in addition the dividends that have been reinvested will also be added to the cost for the investor. This happens as there are additional units that are issued to the investor for the dividend that has been reinvested so this additional figure will be taken to the cost column. The figure is the one that is actually compared to the current value by the investor.
Technically this is a correct way to look at things because the moment the dividend amount is used to buy new units this will become the cost for the investor but in reality there is a slight difference that has to be considered. Take for example a situation where the investor has invested a sum of Rs 50,000 initially and then there is a dividend of Rs 17,000 received over a period of 2 years. The investor will thus have a cost figure of Rs 67,000 in their account statement. Now both these figures are used for the purchase of units so this is the reason why this is reflected in the cost figure. If the current value of the investment is RS 65,000 then the investor will feel that they are losing money on the investment. In reality the situation is different as the investor has just invested Rs 50,000 and this is now 30 per cent higher because the dividends are just earnings so they are actually returns for the investor and this is the part that needs to be understood properly.
The reason why understanding this is vital is that the investor could end up selling off investments that are actually doing well because they have interpreted the wrong thing from these figures and hence the decision could actually turn out to be costly. Looking at the options chosen and then seeing whether they are impacted by the manner of calculation thus becomes an important point for them.