Mutual Funds and NAV- a little know how
Summary: Mutual funds in India are catching up popularity and with more knowledge are becoming an important part of the investment of its people. Yes, it has risk involved, but then a gain without a risk is impossible. So, a quick know how is important to clearly understand what are mutual funds, the different types of mutual funds and what is NAV? And if still you are not sure of managing your funds on your own, rely on you fund manager or contact a trusted Asset Management Company.
Mutual Funds in India have gained much popularity in last few couple of years, however for some it still is a complicated concept to understand and a risky one to invest. But as they say: 'No Risk, No Gain'. So, yes! There is some amount of risk involved, but then what is the other alternative to keep safe that extra money and why not do something to grow it? And yet again, if you are a big shot taking home hefty amount of pay back home, how do you save tax? Also, you are not the one who would go for FDs only. The answer to all of it is investment in mutual funds. But before you do that, you must understand the basics of it. So, in order to simplify it, let’s assume you are a group of 5 friends, each wish to park some amount of money into investment. You have an objective set for your fund and want to ascertain that your fund grows in next 3 years or more to up to certain percentage say. The amount each of you wishes to pool in is different, but then none of you know what the best way to put it to use is.
So, to sort the whole thing, firstly, this your pool of funds is what is called mutual funds and in order to invest the same, a professional called the mutual fund manager will come into picture. He/she with their sound knowledge of the market value of securities builds a portfolio of investments in line with the objective of the scheme. Now, with all the funds gathered so far, it would be insane to put all of it to just one sector. So, after assessing the latest trends your fund manager will park your funds into different sectors, say IT, Infra, Telecom, Healthcare, etc. to name a few. This would help ensure that the risks involved are regulated, because not all sectors or stocks may move into the same direction or in the same proportion and at a given time. So, division of funds makes the whole fund balanced. Also, there are different types of mutual funds, though these are classified basis their principal investment according to the investment objective, but the 4 main categories mutual funds are bonds or fixed income funds, stock or
money market funds and
Now next thing worth explanation is how many units would each of your 5 friends be entitled to, and what will be their NAV (Net Asset Value)? So, initially each of you wished to invest different amounts of money, basis that each investor will hold certain amount of units in the mutual fund, thus all in your group of 5 friends will be called unit holders. Now having invested money in a scheme, each of you 5 people will be allocated units. The value of each unit is called NAV and is reflective of the current market value of single unit holdings. When one investor invests in a fund, they actually buy units of the fund at its NAV price. Now clearly, how many units an investor can buy depends on the NAV of each unit and the total amount of investment. So, NAV per unit is calculated basis the market value of securities of a scheme less the total reoccurring expense and the whole divided by the total number of units if the scheme on any particular date. Since market value of securities change every day, NAV of the scheme also varies.
Now that you know what mutual funds are and
what is Mutual fund NAV, you must further know which scheme would best suit you and while you plan to do so, do read your scheme related documents carefully
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