How to calculate your current unit trust return?

Mr. Smith have invested RM 100000 in unit trust investment scheme 5 years ago. His consultant had purchased several funds with various asset classes for him.

Now, in the year 2013 Mr. Smith would like to know how his funds has performed. Below is the method shown to ascertain the annual percentage of return or otherwise is called as Rate of Return %. The method is quite simple.

Step 1:

Total up all the current value of all funds at present.

 Assume the total value of all funds at present is RM 149000.

Step 2:

Use the time value of money method (TMV) formula, FV = PV(1 + I)power of N.

FV = CURRENT VALUE, which is RM 149999.00

PV = PRESENT VALUE, which is RM 100000.00

N =  INVESTMETN PERIOD, which is 5 years.

I =  INTERNAL RATE OF RETURN, or Annual Rate%

By replacing the figures in the TMV formula as shown above,

149000 = 100000(1 + I )power of 5

I = 8.30%

Now, most investors will measure the return rather differently. I say this way is so rudimental.

Most of us will calculate like this,

(149000/100000 ) x 100 = 49% return in 5 years.

They will divide this by 5, to get 9.80%.

This method is incorrect because the I or rate of return is a compounded interest and not a simple interest rate.

Regards,

Vijaya Devan