Calculating Monthly and Yearly Returns from Net-Asset Value

When it comes to managing and evaluating investment portfolios, one of the key metrics to understand is the Net Asset Value (NAV) and how it changes over time. This article will guide you through the process of calculating both monthly and yearly returns from the NAV. Additionally, we'll explore how to use the financial calculator function to find these returns and provide examples to make the calculations clearer.

Understanding Net Asset Value (NAV)

Net Asset Value (NAV) is the fundamental measure of an investment's value. It represents the total value of all the assets owned by a financial product, such as a mutual fund or an ETF, minus any liabilities and fees. NAV is essentially the total value of the assets per share.

Calculating Yearly Returns from NAV

To calculate the yearly return from the NAV, follow these steps:

Step 1: Determine the Initial NAV (PV)

The initial NAV (Present Value, or PV) is the NAV at the beginning of the year. For example, let's assume that at the beginning of Year One, the NAV was 100.

Step 2: Determine the Final NAV (FV)

The final NAV (Future Value, or FV) is the NAV at the end of the year. Using the same example, if at the end of Year One, the NAV was 118.38, then the FV is 118.38.

Step 3: Use the Financial Calculator to Solve for i

When solving for the interest rate (i) with the financial calculator, plug in the following values:

Present Value (PV): 100 Future Value (FV): 118.38 N (Number of Periods): 1 PMT (Payment): 0

Enter these values into the financial calculator and select the button to solve for the interest rate (i). In this case, the calculated interest rate (i) would be 18.38%. Note that for monthly compounding, you would use 12 as the value for N, and for daily compounding, you would use 365.

Explanation

When compounding is done monthly, the calculation reflects how often the value is being compounded. Monthly compounding (N12) results in a lower interest rate (i1.416), while daily compounding (N365) results in a smaller increment in the interest rate (i0.0462).

Calculating Returns with Dividends

It is important to note that returns can only be calculated with the NAV of a growth option and not a dividend option. Dividends declared can cause a drop in the NAV, and this affects the calculation of the returns. Therefore, when calculating returns, always use the NAV that represents the growth in the asset.

Example Calculation of Yearly Returns

For yearly returns, let's take the year 2018 as an example. You would choose the NAV of 31 December 2017 and 31 December 2018. If the NAV has grown from 100 to 120, the calculation would be:

$$$$$$$$frac{120 - 100}{100} times 100 frac{20}{100} times 100 20$$$$$$$$

This means that the yearly return for 2018 was 20%. Similarly, for monthly returns, if the NAV grows from 100 to 105 from 31 December 2017 to 31 January 2018, the calculation would be:

$$$$$$$$frac{105 - 100}{100} times 100 frac{5}{100} times 100 5$$$$$$$$

This indicates a monthly return of 5%.

Conclusion

Calculating returns from the Net Asset Value (NAV) is a crucial practice in managing investment portfolios. By using the financial calculator correctly and understanding the nuances of dividend declaration, you can accurately measure the performance of your investments. Whether you are calculating yearly or monthly returns, this method provides a clear and consistent way to assess your investment's growth over time.