Want to learn the basics of mutual funds? You should read this; there you'd learn about how mutual funds work and why you should invest in them.
Here I'd highlight why mutual funds have 2 prices and I'd try to break it down as much as possible.
All types of mutual funds have 2 prices: the buy price and the sell price. Finance pros call it the offer price and bid price but I don't intend to confuse you so let's stick with buy and sell price.
Simply, the buy price is the price at which you purchase the fund while the sell price is the price at which you sell the fund. The sell price is also used to value your investment.
For funds that invest in stocks, that is equity mutual funds and balanced mutual funds, the buy price is almost always higher than the sell price while money market funds have equal buy and sell price. For the purpose of this article, we'd concern ourselves with equity and balanced mutual funds.
You'd see something like this on your Cowrywise investment plan page;
1. Example of a money market fund
2. Example of a balanced fund
3. Example of an equity fund
What this means for your investments
To reiterate, you get units based on the buy price when you invest. If you had units and choose to sell, you'd get cash value based on the sell price.
Remember that your investment value is a function of the number of units you own and the price per unit of that mutual fund.
How you earn here
Gains are measured daily based on the increase in the sell price. When that happens, your capital appreciates. Real gains happen when the sell price increases above the buy price you bought at.
To make sense of this better, let's use numbers.
a. Price of Meristem Equity Fund on the 1st of August, 2020
Meristem Equity Market Fund | 01/08/2020 |
Sell Price (NGN) | 7.6312 |
Buy Price (NGN) | 7.7014 |
If you invested NGN500,000 in the fund on 1st of August, 2020, the following would apply;
You paid NGN500,000 at a buy price of NGN7.7014 to get 64,923.26 units of the meristem equity fund
Your investment value at the end of the day is based on the sell price of NGN7.6312, which gives the sum of NGN495,442.39
b. Price of Meristem Equity Fund on the 9th of December, 2020
Meristem Equity Market Fund | 9/12/2020 |
Sell Price (NGN) | 10.2177 |
Buy Price (NGN) | 10.2422 |
If you chose to sell your investment made in September on the 9th of December, 2020, the following would apply;
You would get NGN663,366.39 for your 64,923.26 units of the meristem equity fund based on the sell price of NGN10.2177
Things to note
The prices fluctuate daily based on the performance of the constituents of the fund.
When you buy funds, units are issued to you based on the buy price at the end of the next business day, and then your value every day after is based on the sell price and the units you have.
Balanced funds and Equity mutual funds are riskier options of investments and perform better in the long term. They have tendencies for high gains as well as high losses.
Feel free to hit the chat with us button if there's anything at all you need clarification on.