How to calculate the service charge?

If you are the account holder of any Unit trust funds, you should be familiar with the upfront charges in purchasing unit trust funds. But do you know how to compute the charges in money term?
Let's create an example here:-
Suppose, you are buying a certain fund and that fund charges you an upfront 5.50% service charge.Assume that you are paying RM 10000 in one lump sum. Do you know how much the unit trust company will deduct for their service charge?

Many of you will answer RM 550 ( i.e. 10000 x 0.055).

Well this is a wrong answer!!!

Please note that the 5.50% service charges is not charged on the paid amount. Actually it is charged on the invested amount and it goes like this...5.5% per NAV per unit.

Invested amount is defined as the net amount after deducting service charge.
Paid amount is the gross amount you pay to the unit trust company, in the case example above, it is RM 10000. So how do you calculate the invested amount?

THE EQUATION IS AS BELOW:
Total paid = Total invested + service charge
Total paid = Total invested + [(5.50% per NAV per unit)x (no of total units)]
Total paid = Total invested + [(0.055 x NAV x (total invested/NAV)]
Total paid = Total invested + (0.055 x total invested)
Total paid = Total invested (1 + 0.055)
So, total invested is , Total paid / (1 +0.055)

So if you pay RM10000, using the equation above, your total invested will be (10000/(1.055)
Which is RM 9478.67, and then your service charge will be of course RM 521.33.

So you see, most people will say RM 550 is the service charge but in actual that is wrong!!

Happy investing!!