Today many people are investing in Mutual Fund for their future. You must have seen advertisements for Mutual Funds Investment on TV, Media or many other places. In this post you will know what is Mutual Fund? Also, how many types of mutual funds are there?
To many today, mutual funds may seem like a complicated subject. We are going to try to simplify it for you at a very basic level. Basically, a mutual fund is a pool of money pooled by a large number of people (or investors). This fund is managed by a professional fund manager.
What is Mutual Fund? What is Mutual Fund? ,
Definition: A mutual fund is a professionally-managed investment plan, usually run by an asset management company, that brings together a group of people and invests their money in stocks, bonds, and other securities.
It is a trust that pools money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the fund’s holdings. The income/profit generated from this collective investment is distributed proportionately among the investors after deducting certain expenses, by computing the “Net Asset Value or NAV” of a scheme. Simply put, Mutual Funds are one of the best investment options for the common man that provide him an opportunity to invest in a wide variety of professionally managed securities at a relatively low cost.
Description: As an investor, you can buy Mutual Fund ‘Units’, which basically represent your share in a particular scheme. These units can be bought or sold as per the requirement at the current net asset value (NAV) of the funds. This NAV keeps fluctuating depending on the holding of the fund. Therefore, each investor participates proportionately in the profits or losses of the fund.
All mutual funds are registered with SEBI. They operate within the provisions of strict regulation designed to protect the interest of the investor.
How many types of mutual funds are there?
Various types of mutual fund schemes exist to cater to the different needs of different people. Broadly there are three types of mutual funds.
Equity or Growth Funds
- They mainly invest in equity ie shares of companies.
- their primary purpose wealth creation either capital appreciation it happens.
- They have the potential to generate high returns. Also they are best for long term investments.
You will be able to understand it from the example given here.
- “Large Cap” funds that invest primarily in companies that run large established businesses
- “Mid Cap Funds” that invest in mid-sized companies.
- “Small Cap” funds that invest in small-sized companies
- “Multi cap” funds that invest in a mix of large, mid and small sized companies.
- “Sector” funds that invest in companies that belong to one type of business. eg. Technology funds that only invest in technology companies
- “Thematic” funds that invest in a common theme. eg. Infrastructure funds that invest in companies that will benefit from the growth in the infrastructure segment
- tax saving fund
- Income or Bond or Fixed Income Funds
Income or bond or Fixed Income Funds
- They invest in fixed income securities such as government securities or bonds, commercial papers and debentures, bank certificate of deposits and money market instruments such as treasury bills, commercial paper, etc.
- These are relatively safe investments and suitable for income generation.
- Some examples are liquid funds, short term, floating rate, corporate debt, dynamic bonds, gilt funds, etc.
- They invest in both equity and fixed income, thus offering the best of both, income generation along with growth potential.
- Examples would be Aggressive Balanced Funds, Conservative Balanced Funds, Pension Plans, Child Plans and Monthly Income Plans etc.
What is Net Asset Value (NAV)?
The performance of a particular scheme of a mutual fund is represented by the Net Asset Value (NAV). In simple words, NAV is the market value of the securities held by the scheme. Mutual funds invest the money collected from investors in the securities markets. Since the market price of securities changes every day, the NAV of a scheme also changes on a day-to-day basis.
The NAV of all mutual fund schemes is declared at the end of the business day after market close, as per SEBI mutual fund convention.
What is Net Asset Value Formula?
Calculating net worth is very simple. One can easily do this by using the formula given below –
The net value of an asset = (Total asset – total liabilities)/ total outstanding shares
However, it is important to input the correct eligible items under assets and liabilities to get the Net Value of Assets.
What is Net Value of Assets for Mutual Funds?
Mutual funds, unlike stocks, do not trade in real time. Instead, they are calculated based on the business method and mainly depend on various assets and liabilities.
The asset section of a mutual fund includes the cumulative market value of a particular fund’s investments, receivables, cash, cash equivalents and other earned income. This market value is calculated at the end of each day, based on the closing price of various securities included in the fund’s portfolio. These funds may include a percentage of the capital in the form of liquid assets and cash as well as other items such as interest payments, dividends, etc.
The liabilities section, while calculating net asset value mutual funds, includes outstanding payments, money owed to lenders, and other fees and charges payable to affiliated entities.
Apart from these, mutual funds may also have foreign liabilities, which may include shares held by non-residents, pending payments to foreign companies and various sale proceeds that are yet to be disbursed.
Liabilities can also include various accrued expenses including utilities, staff salaries, operating expenses, distribution, management expenses etc.
Thus, for the net asset value calculation for mutual funds, the amount of the above liabilities and assets as on the end of a day is taken into account.
How to Calculate NAV of Mutual Fund
You can calculate a mutual fund’s NAV by dividing the fund’s total net assets by the total number of units issued to investors.
When it comes to investing, certain terms hold special significance. Net Asset Value (NAV) is one such term for mutual fund investors. This abbreviation comes up whenever you try to buy or sell mutual fund units.
In simple words, NAV is the market value per unit of a mutual fund.
Simple calculation of Net value of assets
All mutual fund investment companies evaluate the total value of their portfolio after the stock market closes at 3:30 pm. The market reopens after the previous day’s closing prices. The fund house accordingly deducts all expenses to arrive at the net valuation of assets for the day, using the formula mentioned above.
The normal net value of assets of the asset is the cost of its equity shares and is given by the cumulative cost of the individual shares. This calculation gives the market value of a particular property and is subject to change as per market fluctuations.
Let us understand NAV with the help of an example
Manish G invests in 2 different schemes, Scheme-A and Scheme-B. He invested Rs 1 lakh in both the schemes.
The NAV of Scheme-A is Rs.10
The NAV of Scheme-B is Rs.50
Units to be allotted are
Plan-A: 10000 units (100,000/Rs 10)
Plan-A: 2000 units (Rs 100,000/50)
The return earned in both the schemes is 10% after one month
Here the Revised NAV per unit is Rs.11 for Scheme-A and Rs.55 for Scheme-B. The initial amount invested for both the schemes is Rs 1 lakh. The difference is only in the number of units allotted, units allotted in scheme-A are more than in scheme-B. But the NAV and returns are same for both the schemes. Hence, NAV is not the only factor that comes into play to measure the performance of a fund.
Mutual Fund NAV is the book value of the scheme. While investing in any scheme, an investor must check the past performance of the scheme. Also, an investor should look at the returns earned by the fund over the years.
Role of NAV in Fund Performance
Most investors believe that the net value of an asset is proportional to its share price. Thus, they think that funds with lower net asset value are cheaper and result in better investments. However, the net asset value calculation is not correlated with the performance of the fund. Just because a fund has a low net worth doesn’t make it a great investment.
The net worth of an asset simply reflects how the underlying assets have performed over the years. Hence, investors should not make this a deciding parameter while selecting the funds to invest in it. They must check the returns from their investments to make an informed decision.
Thus, the net value of an asset is useful when it comes to understanding how a fund performs on a day-to-day basis. It does not indicate how attractive the fund is. Hence, investors should check the current cost of the fund and its historical performance before investing in it.