154) Returns from Different Unit Prices.
Is there any difference on the returns from lower & higher unit prices?
Is it better to buy a lower unit price funds compared to a higher price units?
By buying a lower unit price funds, you can get more units and at a cheaper price.
Let's take 2 funds as a case study.
Fund A at $0.25 per unit and Fund B at $0.80 per unit.
You invested $1,000.
Assume the service charges are the same and paid separately.
Fund A:
Unit price: $0.25
Number of units = $1,000/$0.25 = 4000 units.
Fund B:
Unit price: $0.80
Number of units = $1,000/$0.80 = 1,250 units.
Let's say both funds made 10% returns in 1 year.
Using the formula: FV=PV(1+i)^n
Fund A:
New Unit price: $0.25 (1+ 10%) = $0.275
Number of units = 4000 units
Total value = 4000 x $0.275 = $1100.
Fund B:
New Unit price: $0.80 (1+ 10%) = $0.88
Number of units = 1250 units
Total value = 1250 x $0.88 = $1100.
Both Fund A and Fund B gave the same result in terms of Dollars.
In conclusion, the beginning fund price does not really matter. A higher or lower unit price does not indicate a fund is better than another fund.
What is more important is the percentage return.
Let's look at the Formula for Future Value, the value of your current investment will grow to, in the future.
Formula: FV=PV(1+i)^n
FV = Future Value (End value)
PV = Present Value (Begiin value)
i = Annualized returns
n = number of years.
Unit price is not part of the equation.
FV = Future Value (End value)
PV = Present Value (Begiin value)
i = Annualized returns
n = number of years.
Unit price is not part of the equation.
What is important is that the Future Value depends on the Present value, annualized returns and number of years invested.
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