179) Unit Price and Number of Units Effect

179) Unit Price and Number of Units Growth Rates Effect on Investment Values.

I was asked this question....
Which is more important? Unit Price Or Number of Units to determine investment values.

Is it better to have more units or increase of unit price.
The answer...????????

Both Unit Price and Number of Units are important! You definitely will be richer if both values increased. Basically, it means you have more units and each unit price increased.

Let us look at this new FORMULA on Total Returns calculations for Unit Trust investments.
Assumptions:
a) Single investment. 
b) No additional top up nor withdrawal.
c) All distributions are reinvested. 
d) No Service Charge nor other charges.

As you know, 

Total NAV = Number of Units X Unit Price

Total Return = (End Price - Begin Price)/Begin Price

(1 + Total Return) = (1 + Number of Units Growth) x (1 + Unit Price Growth)

Using simple symbol,
(1+TR) = (1+NUG)(1+UPG)

Example 1: Unit Price Increased
Initial:
Unit Price: $0.50
Number of Units:1000
Total NAV = 1000 x $0.50 = $500.

Current:
Unit Price: $0.60 (increased)
Number of Units:1000 (remains the same)
Total NAV = 1000 x $0.60 = $600.

Total Return, TR = (600-500)/500
TR = 100/500
TR = 20%

Using the new Formula,

Number of Units Growth, NUG = (1000 - 1000)/1000 = 0%
Units Price Growth, UPG = (0.60 - 0.50)/0.50 = 20%

(1+TR) = (1+NUG)(1+UPG)
(1+TR) = (1+0%)(1+20%)
(1+TR) = (1+20%)
TR = 20%

Example 2: Number of Units Increased
Initial:
Unit Price: $0.40
Number of Units:1000
Total NAV = 1000 x $0.40 = $400.

Current:
Unit Price: $0.40 (remains the same)
Number of Units:1300 (increased)
Total NAV = 1300 x $0.40 = $520.

Total Return, TR = (520-400)/400
TR = 120/400
TR = 30%

Using the new Formula,

Number of Units Growth, NUG = (1300 - 1000)/1000 = 30%
Units Price Growth, UPG = (0.40 - 0.40)/0.40 = 0%

(1+TR) = (1+NUG)(1+UPG)
(1+TR) = (1+30%)(1+0%)
(1+TR) = (1+30%)
TR = 30%

Example 3: Number of Units Increased and Unit Price Increased
Initial:
Unit Price: $0.40
Number of Units:1000
Total NAV = 1000 x $0.40 = $400.

Current:
Unit Price: $0.60 (increased)
Number of Units:1300 (increased)
Total NAV = 1300 x $0.60 = $780.

Total Return, TR = (780-400)/400
TR = 380/400
TR = 95%

Using the new Formula,

Number of Units Growth, NUG = (1300 - 1000)/1000 = 30%
Units Price Growth, UPG = (0.60 - 0.40)/0.40 = 50%

(1+TR) = (1+NUG)(1+UPG)
(1+TR) = (1+30%)(1+50%)
(1+TR) = (1.3)(1.5)
(1+TR) = 1.95
TR = 95% 

Example 4: Number of Units Increased, but Unit Price Decreased

Initial:
Unit Price: $0.40
Number of Units:1000
Total NAV = 1000 x $0.40 = $400.

Current:
Unit Price: $0.30 (decreased)
Number of Units:1200 (increased)
Total NAV = 1200 x $0.30 = $360.

Total Return, TR = (360-400)/400
TR = -40/400
TR = -10%

Using the new Formula,

Number of Units Growth, NUG = (1200 - 1000)/1000 = 20%
Units Price Growth, UPG = (0.30 - 0.40)/0.40 = -25%

(1+TR) = (1+NUG)(1+UPG)
(1+TR) = (1+20%)(1-25%)
(1+TR) = (1.2)(0.75)
(1+TR) = 0.90
TR = -10%

Example 5: Number of Units Increased, but Unit Price Decreased

Initial:
Unit Price: $0.40
Number of Units:1000
Total NAV = 1000 x $0.40 = $400.

Current:
Unit Price: $0.30 (decreased)
Number of Units:1400 (increased)
Total NAV = 1400 x $0.30 = $420.

Total Return, TR = (420-400)/400
TR = 20/400
TR = +5%

Using the new Formula,

Number of Units Growth, NUG = (1400 - 1000)/1000 = 40%
Units Price Growth, UPG = (0.30 - 0.40)/0.40 = -25%

(1+TR) = (1+NUG)(1+UPG)
(1+TR) = (1+40%)(1-25%)
(1+TR) = (1.4)(0.75)
(1+TR) = 1.05
TR = +5%

In Example 1, 2 and 3, there are growth in Number of Units or/and Unit Price.

But in Example 4 & Example 5, the Number of Units increased (positive growth), but the Unit Price decreased (negative growth). 


To get Total Return, the Number of Units positive growth is only half the equation.

You need to multiply the growth rates for both values (Number of Units Growth and Unit Price Growth) to determine the final Total Returns.

In Example 4, the Unit Price Decrease Percentage is much MORE than the Number of Units Increase Percentage. When you multiple the numbers to get Total Return, the total percentage is LOWER than 100%. Therefore you got LOSS.
 
In Example 5, the Unit Price Decrease Percentage is much LESS than the Number of Units Increase Percentage. When you multiple the numbers to get Total Return, the total percentage is HIGHER than 100%. Therefore you got GAIN.

For more explanation, go to this link;


204) How Much Future Returns Required to Recover Past Losses?http://highlevelrules.blogspot.com/2018/08/returns-to-cover-lossses.html


For more explanation on effect of currency, go to this link;

180) How Foreign Exchange Impact Your Foreign Investments http://highlevelrules.blogspot.com/2018/06/how-foreign-exchange-impact-your.html


Please note that these are Total Returns calculation. If you invest into good investments for the long term, the investment will grow in value and thus makes your money grow.


Note that you need a higher positive return to recover the negative returns.