How do equity funds make money, how are percentage returns calculated, and do returns reset to zero each month?

Equity funds make money mainly from rising share prices and dividends. Your percentage return measures your gain or loss over a particular period. No, your investment gains do not automatically reset to zero each month.

Let me use Mama Ngozi’s money to explain.

Mama Ngozi puts ₦100,000 into an equity fund. The fund gathers her money together with money from other investors, and a fund manager uses it mainly to buy company shares. Those shares are small ownership stakes in businesses.

The fund can earn money when the shares it owns rise in price, and when companies pay dividends, which are payments from their profits to shareholders. But share prices can also fall, and companies may reduce or stop dividends. Fund expenses also reduce what investors earn.

How does Mama Ngozi see her own share of the money?

She owns “units” in the fund. Think of units as portions of the investment basket. The value of each unit reflects what the fund owns, after what it owes and its expenses.

Here is an example using made-up figures.

If one unit costs ₦10, Mama Ngozi’s ₦100,000 buys 10,000 units, ignoring any entry charges.

Later, the unit price rises to ₦11. Her 10,000 units are now worth ₦110,000. She still owns the same number of units, but each unit is worth more.

Her gain is ₦10,000. To calculate the percentage return:

Percentage return = gain divided by starting investment, multiplied by 100.

So, ₦10,000 divided by ₦100,000, multiplied by 100 = 10%.

That simple calculation assumes she made no extra deposits or withdrawals and received no separate cash distributions. If the fund pays income to her separately, that income must also be included when calculating her total return.

Now, what happens when a new month starts?

Her ₦110,000 does not go back to ₦100,000 simply because the calendar changes. What may restart is the period used to measure performance on the app.

“Month-to-date” means the return from the beginning of this month until today. That measurement starts afresh each month.

“Year-to-date”, or YTD, means the return from the beginning of the current year until today. It starts afresh each year.

“Since you invested” measures performance from when you put your money in. It does not restart each month.

Suppose Mama Ngozi’s investment grows from ₦100,000 to ₦110,000 in the first month, then to ₦115,500 in the second month, with no deposits, withdrawals or payouts.

Her first month’s return is 10%. Her second month’s return is 5%, because the second month started with ₦110,000. Her total return since investing is 15.5%, not 15%. The second month’s growth happened on money that had already grown.

Also, a displayed gain is not necessarily cash paid into your bank account. It may still be inside the value of your units and can fall before you sell. Some funds distribute income; others retain it in the fund. Check your fund’s policy.

So when you see a percentage on your app, check the label: monthly, month-to-date, YTD or since investment. Also check whether it includes dividends and is after fees. The fund’s factsheet or fund manager should explain this.

The calendar can restart the performance measurement. It does not wipe away the value of the units you own.