Understanding 'Mutual Fund Units & NAV

Hello fellow investors

More than 6 months into lockdown, 1 market crash and 1 great recovery, the only constant thing is our learning and our Thursday emails. We started writing our emails soon after lockdown and now we enjoy it so much that we cannot wait for the next Thursday to come and share some insights from the finance world with you.

In today's email, I am going back to the basics of Mutual Funds and explain what exactly are Mutual Fund Units and NAV and how they help or not help you make investment decisions.

What is a Mutual Fund Unit?

Just as share represent the ownership of Equity, units represent the ownership of Mutual funds. When you invest 5000 INR in a mutual fund and the NAV of the fund is 50 INR - you would get 100 units.

It is like buying petrol when you go to the petrol pump, you ask them to fille petrol in your car for 1000 INR. If the price per litre is INR 100, you would get 10 litres of petrol in your car.

Let's understand a few facts about Units of Mutual Funds

1. You don't need to buy 1 entire unit of Mutual Fund
You can buy a mutual fund in fractions or parts, it is the amount of money you invest that determines how many units you get. Like when you fill petrol in your car, you tell them fille petrol of INR 1000, if per litre petrol price is 72, you get 13.88 litres of petrol. The same thing happens with Mutual Funds.

2. You do not sell all your units to withdraw from Mutual Funds.
As you can partially invest in mutual funds, you can also partially withdraw from mutual funds. You can do that anytime you want (unless they are close-ended schemes)

3. Units are not the same as the share price
Equity Mutual Funds invests in Equity stocks/shares but it does not mean that units are the same thing. The share price is of an individual company and the demand and supply of that particular stock are one of the factors of their share price movements. Such does not happen to mutual fund units.

An average of all the underlying stocks of the mutual funds helps determine the value of each unit which is called as Net Asset Value - NAV.

4. NAV is the price of each unit
The price of each unit of a mutual fund is the NAV. If you want to buy 1 unit of a mutual fund, the price you have to pay is the NAV of that mutual fund’s unit on that day.NAV changes every day. So when the NAV goes up, you gain.

A high NAV does not mean that a particular Mutual Fund is better than the one with a low NAV. NAV price does not determine the value of the Mutual Fund.

NAV= (Total market value of assets invested by the fund-Expenses)/No of Units

5. Mutual fund unit price (NAV) goes up and down

As NAV is determined based on the total market value of the assets invested in by mutual fund which includes shares, bonds, cash, any interest or dividend earned by them and would also capture the movement in the price of shares & bonds, the NAV would also move.

NAV of a fund changes every day where there is a change in the underlying asset, this change helps you know if you are in profit or loss.

Mutual Funds are considered one of the most common forms of investing today, in fact it has generated a lot of wealth for investors who have understood the risk of investing in them and managed it appropriately. We will soon be launching a course on Mutual Funds and more, so stay tuned and keep reading our emailers for a detailed update on the same super soon.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.

Understanding a Mutual Fund

A Mutual Fund is a TRUST that pools the savings of a number of investors who share a common financial goal.

The money collected is then invested in capital market instruments such as shares, debentures and other market securities. The investments of the mutual fund are driven by the investment objectives of the scheme.

The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them after recovery of the management expenses.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

About MF_1

FLOW OF FUNDS

The following are the parties to a Mutual Fund:

Unit Holder: is a person who is holding the units in a scheme of a mutual fund. The term is comparable to shareholder in case of a company. Unit holder can be a resident individual, HUF, company, NRI, partnership, society etc.

The Mutual Fund: As stated, the Mutual Fund is the legal entity in the form of a trust which holds investments of its Unitholders.

Sponsor: A sponsor is the promoter who sets up the Mutual Fund, appoints trustees and the AMC in accordance with the SEBI Regulations. Generally the sponsor and the AMC are part of the same business house.

Trustee: A trustee is appointed by the sponsor. The trustee holds the property of the mutual fund for the benefit of the unit holders and is responsible to the investors of the fund. The trustee is vested with the general power of superintendence and direction over the AMC.

About MF_2

INTER RELATIONSHIPS

Asset Management Company(AMC): AMC is the business face of the mutual fund as it manages all the affairs of the fund. Investment professionals employed by the AMC determine which securities to buy and sell in the fund’s portfolio, consistent with the fund’s investment objectives and policies. In addition to managing the fund’s portfolio, the AMC often serves as administrator to the fund with the support of the R&T agent and the Custodian.

R&T Agent: The Registrar and Transfer Agent (R&T) helps investors with the purchase of units in the Mutual Fund schemes, redemptions and switches, change of address and bank details and resolving related queries and complaints. CAMS and KARVY are the key R&T agents in India.

Custodian: The securities which form a part of the mutual fund’s portfolio are usually held by an authorized custodian. The custodian is like the mutual fund’s demat account.

Distributor: A distributor acts as an intermediary between the mutual fund and the investor. He helps the investor choose the right fund as per the investor's objectives. Mutual fund units can be distributed by only AMFI registered, certified distributors.

AMFI: The Association of Mutual Funds in India(AMFI) is a body dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders.

SEBI: SEBI is the market regulator in India which, apart from other functions, overseas the functioning of the entire Mutual Fund industry with the objective of protecting the interest of investors.

Investments / Mutual Funds - 10/01/2018

Risk Involved in Investing in Debt

Risk refers to uncertainty in returns. Debt instruments are considered less riskier than Equities because there is a lesser uncertainty in the returns one can expect from Debt Instruments. Never the less, following are the major risks are involved in investing in Debt Securities.

Interest-Rate Risk

Fixed income securities such as bonds, debentures and money market instruments face interest-rate risk. Generally, when interest rates rise, prices of existing fixed income securities fall and when interest rates drop, prices of fixed income securities increase.

For example: If a Rs. 100 par value security offers 9% rate of return, and the prevailing rate of interest increases from 9% to 10%, the values of the security will fall below Rs. 100 because it offers a lower rate of return(9%) compared to the market return(10%). The extent of fall or rise in the prices depends on the existing coupon rate, time to maturity of the security and the quantum of increase or decrease in the interest rates.

Credit Risk

In simple terms this means that the issuer of a debenture/bond or a money market instrument may default on interest payment or in paying back the principal amount on maturity. Even if no default occurs, the price of the security may go down if the credit rating of the issuer of the debt instrument goes down.

Investment in Government securities has zero Credit Risk as the Government is not expected to default on its obligations.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value. Liquidity risk can be measured by the difference between the buy price (bid price) and the sell price (offer price) quoted by a dealer. Larger the difference, greater is the Liquidity Risk. Indian Debt market has a higher Liquidity risk compared to Global Debt market, because of low trading volumes in the Indian Debt market.

Reinvestment Risk

If interest rates fall, the coupon payments being received on fixed income securities will have to be re-invested at the lower prevailing interest rate. This is known as Reinvestment Risk.

For example: If you are receiving 9% coupon on a fixed income security, and the prevailing interest rates are 7.5%, the coupon payment received will have to be invested at the lower rate of 7.5%.

As zero coupon securities do not provide any periodic interest payments they do not have Reinvestment risk. However, they have a higher interest rate risk.

Debt / Investments - 09/24/2018

Types of Mutual Funds

In the last few years, mutual fund companies were releasing various mutual fund scheme and there was a lot of confusion amongst retailers on the definition of the same and how are the classified. To avoid this, SEBI released a notification to classify mutual fund schemes into 5 broad categories:

Equity Schemes
Debt Schemes
Hybrid Schemes
Solution Oriented Schemes
Other Schemes

An understanding of the classifications of the various categories of schemes will help sort clear the confusion to a certain extent.

All the listed Equity Stocks are divided into large cap, mid cap, and small cap equity stocks based on the ranking on the stock exchange as per their market capitalization. Accordingly, AMFI, in consultation with SEBI and Stock Exchanges, has prepared the list of stocks, based on the data provided by Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI).

Large Cap Equity Stocks - 1st - the 100th company in terms of full market capitalization.
Mid Cap Equity Stocks are - 101st - the 250th company in terms of full market capitalization.
Small Cap Equity Stocks are - 251st company onwards in terms of full market capitalization

EQUITY MUTUAL FUNDS

Any fund which invests not less than 65% of its corpus in equities is known as an equity fund.

Multi-Cap Funds: An Open-ended equity scheme which invests a minimum of 65% of its total assets in equity related instruments. These funds invest across large-cap, small-cap and mid-cap stocks.
Large Cap Funds: An open-ended equity scheme which invests a minimum of 80% of its total assets in large-cap equity stocks.
Large & Mid Cap Funds: An open-ended equity scheme which invests in both large-cap and mid-cap stocks with a minimum of 35 % of its total assets in large-cap equity stocks and a minimum of 35% of. its total assets in mid-cap stocks.
Mid Cap Funds - An Open-ended equity scheme which invests a minimum of 65% of its total assets in mid-cap equity stocks.
Small Cap Funds - An Open-ended equity scheme which invests a minimum of 65% of its total assets in small-cap equity stocks.
Dividend Yield Funds - An open-ended scheme which predominately invests in dividend yielding stocks and has a minimum of 65% of its total assets invested in Equity.
Value Funds - An open-ended scheme following a value investment strategy and invests a minimum of 65% in equity and equity related instruments.
Contra Funds - An open-ended scheme should follow a contrarian investment strategy with a minimum of 65% in equity and equity related instruments.
Focussed Fund - An open-ended scheme focussed on the number of stocks (maximum 30) and has a minimum investment of 65% of its total assets in Equity and equity related instruments.
Thematic Funds: These funds are also known as Sectoral Funds. An open-ended scheme which invests a minimum of 80% of its assets in equity stocks of a particular sector/theme. Such funds can be focused on Infrastructure, Power, Banking sector, Pharma companies, only Public Sector Undertakings(PSUs), etc.
ELSS - Equity linked savings scheme - An open-ended scheme with a statutory lock-in of 3 years for the purpose of tax deduction. It has a minimum investment in equity and equity related instruments of a minimum of 80%.

DEBT FUNDS

Debt Funds are funds that invest in debt securities like debentures, commercial paper(CP), certificate of deposit(CD), government securities, etc.

Overnight Funds - Investment in overnight securities having a maturity of 1 day.
Liquid Funds - Investment in debt and money market securities with a maturity of up to 91 days only.
Ultrashort Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months - 6 months.
Low Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months- 12 months.
Money Market Funds -Investment in Money Market instruments having maturity up to 1 year
Short Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years
Medium Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years
Medium to Long-Duration Funds - Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years
Long Duration Funds - Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years
Dynamic bond - An open-ended dynamic debt scheme investing across the duration
Corporate bond Funds - An open-ended debt scheme with a minimum investment of 80% in the highest rated corporate bonds
Credit Risk Funds - An open-ended debt scheme with a minimum investment of 65% in the highest rated corporate bonds.
Banking and PSU Fund - An open-ended debt scheme with a minimum investment of 80% of total assets in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions
Gilt Fund - An open-ended debt scheme with a minimum investment of 80% of its total assets in government securities across the maturity
Gild Fund with a 10-year constant period - An open-ended debt scheme with a minimum investment of 80% of its total assets in government securities having a constant maturity of 10 years
Floater Fund - An open-ended debt scheme with a minimum investment of 65% of its total assets in floating rate instruments.

HYBRID FUNDS

Hybrid funds are funds that invest in a mix of debt and equity based on their investment mandate.

Conservative Hybrid Funds - An open-ended scheme investing 10%-25% of its total assets in Equity and 75% -90% in debt instruments.
Balanced Hybrid Funds - An open-ended balanced scheme investing up to 40%-60% of its total assets in both debt and equity. No arbitrage is permitted in this scheme.
Aggressive Hybrid Funds - An open-ended hybrid scheme investing 65%-80% of total assets in Equity and Equity related instruments and 20%-35% in debt and debt related instruments.
Dynamic Asset allocation or balanced advantage - Investment in equity/debt that is managed dynamically. (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments)
Multi-Asset Allocation - An open-ended scheme which invests in at least three asset classes with a minimum of 10% in each of the three asset classes.
Arbitrage Funds - An open-ended Scheme following arbitrage strategy. Minimum investment in equity and equity related instruments of 65 of total assets.
Equity Savings - An open-ended scheme investing in equity, arbitrage and debt with a minimum investment of 65% of its total assets in equity or equity-related instruments and a minimum of 10% in debt instruments.

SOLUTION ORIENTED FUNDS

Retirement Fund - An open-ended retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier)
Children's Fund - An open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier)
Index Funds/ETFs -An index fund is a mutual fund or exchange-traded fund(ETF) that aims to replicate the returns of a specific index. The fund manager does not have a major role as he has to only replicate the composition of the index.
FOFs (Overseas Funds) - An open-ended fund of fund scheme investing 95% of its total assets in the underlying funds.

Investments / Mutual Funds - 04/12/2018

GET STARTED

Attend a Workshop

Quick Financial Review

Schedule a workshop at your office

ABOUT US

About Us

Join Us

WCafe Financial Services Pvt Ltd (formerly known as Wealth Cafe Financial Services Pvt Ltd) is a AMFI registered ARN holder with ARN-78274.

WCafe Financial Services Pvt Ltd (formerly known as Wealth Cafe Financial Services Pvt Ltd) is a SEBI registered Authorised Person (sub broker) of Sharekhan Limited with NSE Regn AP2069583763 and BSE Regn AP01074801170742.

Terms & Conditions | Privacy Policy