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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.



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SIP top-up (Increase your SIP amount)

What is the SIP top-up (step-up) facility?

A systematic investment plan (SIP) allows you to put a fixed sum of money every month in a mutual fund. But most of us get a raise in our salaries every year. This means we can afford to increase our investments. But how do you do that in a SIP that is already going on? Enter top-up or step-up facility. It is important that as your income grows, the quantum of investment should grow too.

How wealth is created under SIP top-up plan?

SIP SIP top-up
Investment Amount 5000 10% increase per annum
Investment Product Equity Equity
ROR 12% 12%
Period years 20 20
The amount at the end 49.46 lakhs 98.45 lakhs

Hence, you can see that by increasing your SIP by 10% each month, you will create wealth which is twice as much as your investment amount. This is how SIP top-up helps you generate wealth faster.

Decide on the amount you want to increase your SIP by, or by the percentage of increase. You can also cap your amount in case you think you won't be able to afford a monthly investment beyond a point. For instance, in our example above, a 5% annual increase would mean you would need to invest Rs11,790 every month in the 10th year and Rs30,580 in the 20th (final) year. Once your monthly installment hits the ceiling, your top-up facility stops and then you keep investing that same amount for the rest of your SIP tenure.

Wealth Cafe Actionable - Where you are a salaried individual, ensure that you do a SIP  top-up based on your regular increment in your salary amount.

 

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When is the right time to start your investments?

In our workshops, we have discussed with so many people who say that they are waiting for the markets to go down to start their investments or they are waiting to have enough before they start. Some may even argue to say that they want to enjoy life today and will invest tomorrow (in spite of having enough savings in their bank account). Some feel they are just waiting for the right time to start investing.

The RIGHT time to start your Investments is NOW

The best time was yesterday, but now that is gone right time is today. With every day you push to invest your money, you are reducing your money from growing and making wealth for you.

If you are following the basic rules, you will definitely get it right. It is quite usual for you to feel a bit nervous when you are investing in unfamiliar instruments for the first time. But you will learn on the way. So, don't let your nervousness delay your investments further.

To help you understand what you are missing every time you are delaying your investment choice, we have tabulated below an example:

Priya Shreya
Sip 5000 5000
SIP start Age 25 30
SIP Stop Age 30 60
Investment till Age 60 60
SIP done for how long (in years) 5 30
Amount Invested  25,000 1,50,000
At the age of 60, returns they got 22,32,125 21,73,726

In the above example, Priya started at the age of 25 and invested for only 5 years, until she was 30. However, she did not withdraw her investment out until she was 60.

On the other, Shreya started her investment only at the age of 30 and continued to invest until she was 60. She invested around INR 150,000 and Priya invested around INR 25,000.

You would obviously expect Shreya to make more money than Priya. But, it is Priya who has made great returns from just an investment of INR 25,000. This is the power of starting early.

When you start your investments today, you have to invest less and you will reach your goals sooner.

START NOW !!

It is possible that some of you may be anxious as to how should you start your investment and where to put your money. For all of you do not worry, doing a SIP for your mutual fund is a great start and we have written many blogs on how should you invest and are writing more.

Always try to match your goals with your investment choice. This will help you eliminate unwanted choices, and identify the right ones. It will also save you a lot of headaches later. As a rule, avoid risky investments like stocks, equity mutual funds for short-term goals (3 years and less than 3 years). This is because equity can be extremely risky and volatile in the short-term. You should try to preserve your capital and try to secure stable returns for short-term needs. However, if you have time in hand, you can be a little adventurous and invest in equity. It will help you earn a few extra percentages. This is because equity has the potential to give higher returns than any other asset class over a long period of time.

Don't forget to review your investments periodically. Investing and forgetting all about it is not a great strategy. You should regularly check how your investments have done over a period of time.

Wealth Cafe Actionable - Where you are investing in Equity for long term goals, do not forget to sell your risky investments at least three years before your goal and park the proceeds in a safe avenue. This is to ensure that you have the money safely parked somewhere when you need it and the market risk will not hamper your goals. Start your investments now!!

 

 

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Timing the market for your SIP investments?

Many of us keep waiting for that right time to invest.

A popular stock-market adage is 'Time in the market is more important than timing the market'. It may be a popular principle but unfortunately not many observe it in practice. Many people based on the basic discussions, newspaper articles or just their basic reading believe that they understand the trends of the market and start timing the market to make investments.

The curious thing about market timing is that the market almost unfailingly moves in the opposite direction to what you would expect. If you buy shares in a company thinking that 'this' is the right time, you are appalled by the fact that the stock starts to fall just after you buy it. Similarly, if you sell out your shares in a company because you have a strong gut feeling that it's going to collapse, you find it racing ahead of just about everything. It must have happened to the smartest of us.

Timing the investment in Mutual Funds

If you think you are immune to this behavior just because you invest in mutual funds rather than directly in stocks, you are mistaken. Mutual funds investors frequently try to time their systematic investments in response to the market's ups and downs. When the market is falling, they stop their SIPs. When it is rising, they increase their SIP amounts. This invariably backfires.

SIPs work best when the markets are volatile. When the markets are high, you buy fewer units of your mutual funds through SIPs. When the markets are down, you buy more units for the same amount. This enables you to average your investment cost over time. But if you stop SIPs when the markets are down, you miss out on lowering your total investment cost. And if you increase your SIP amounts when the markets are on the rise, you keep averaging your overall cost upwards.

Now you may say that the solution to this problem is to do just the opposite: stop with SIPs when the markets are rising and increase the SIP amounts when they are falling. Unfortunately, timing the market in this manner is just as unfruitful. First, it is counter-intuitive. Many investors will have difficulty in carrying through their decision to invest when the markets are down and sell when they are up. And second, you can never really know how long the market may keep going up or falling. All in all, it's quite unproductive to time the market.

How SIP Works to make the most of the market trend

When the market goes down - you get more Mutual Fund units
When the market goes up- you get lesser Mutual Fund units
Hence, the SIP helps to average the cost over a period of time and makes the most of our money. We may not always know that the market is down now, we should buy more or otherwise, SIP is automatically taking care of that for us.

The beauty of SIPs is that by definition they prevent you from timing the market. SIPs are about discipline. You decide an amount and a frequency, which in most cases is monthly. Then you keep investing in the mutual fund of your choice, irrespective of where the market is. Of course, you can increase your SIP amount yearly as your pay increases but then invest it evenly till the next revision. Since the markets are volatile, you will naturally benefit from the power of rupee cost averaging, which will increase your returns.

Wealth Cafe Actionable - As we have said, SIPs is an easy way to invest your money and it on its own makes the most of the market trend. Once you have started SIP, just keep reviewing your asset allocation occasionally and let them be.

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Why should you do a SIP?

Systematic Investment Plan (SIP) as we know it, has become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they have so many advantages: Become a Disciplined Investor A SIP helps you to discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the pre determined date. This ensures that money does not lie in your savings account at a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend. Rupee Cost Averaging Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, the rookie investors will obviously not be able to gain much. It is a useless activity, even attempting to time the increasing volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out. The timeless principle is "Buy Low Sell High". However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help overcome this problem.
                                                                   Bit by Bit, you can grow your fortune
Achieve your Financial Goals Your future financial goals like buying a car, buying a house, a child's education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments. Compounding Benefits The biggest advantage of regular long term investments, compounding benefits. The investments made continue to grow year on year and the invested profits participate in growth in future years. Effortless Investments Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime. The convenience, returns and all the other benefits of SIPs have made SIPs the most preferred and the favoured form of investments. If you still have any questions, you can ask the same in the comment section below.
SIP

Why a Systematic Investment Plan(SIP)?

SIPs have become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising since they come with considerable benefits.

Become a Disciplined Investor

A SIP helps you discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the predetermined date. This ensures that money does not lie in your savings account @ a meagre 3.5% and there is no temptation to spend that amount as it is not there to spend.

Rupee Cost Averaging

Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able to do it consistently. When experts have failed, what about a rookie investor. It is useless, even attempting to time the increasingly volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out.

The timeless principle is "Buy Low Sell High". However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help to overcome this problem. 

Achieve your Financial Goals

Your future financial goals like buying a car, buying a house, child's education can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments.

Compounding Benefits

The biggest advantage of regular long term investments, Compounding Benefit. The investments made continue to grow year on year and the invested profits participate in growth in future years.

Effortless Investments

Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction, the SIP can be stopped at anytime.

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