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What is NAV (Net Asset Value) in Mutual Fund?

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As we discussed in our mutual fund article, the units allocated into an account are based on the NAV of that mutual funds. Today we’ll see what NAV is, how it is calculated and how it affects the money invested.

  1. NAV = Net Asset Value?

    In very simple terms, NAV is nothing but the price you pay to buy the unit of mutual funds. So, if the Net Asset Value of a mutual fund is 22.85, that simply means you would need to pay Rs 22.85 to purchase one unit of that mutual fund. Most of the time, the unit cost of mutual funds begin with Rs. 10 and increase as the assets under the funds grow. Going by this rule, the more popular a mutual fund is, the higher is its Net Asset Value. But of course, it is not an indicator of whether or not a fund is good or bad, or rather cheap or expensive. There’s a whole list of things that you should look for when you are purchasing a mutual fund or SIP.

     

  2. How Net Asset Value calculated?

    The calculation of NAV is pretty simple and straightforward. It has a very basic formula, that is NAV = (Total asset – total liabilities)/ total outstanding shares It is calculated based on the day’s closing prices for each individual asset. So at the end of every day the NAV is updated, after the stock market closes at 3:30 pm. The market reopens the day after with the closing prices of the previous day. The fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day, using the formula mentioned above.

  3. How is NAV relevant to investors? Is low NAV good or high NAV good or bad?

    A lot of investors think net asset value is similar to a stock price. This causes them to believe that a fund with a lower net asset value is cheaper and hence, a better investment. In truth, it is not an indicator of mutual fund performance. A lower value alone does not make a fund a better investment or vice versa. Hence, it should not be the only determining factor to choose a mutual fund. So, Net Asset Value doesn’t really reflect a lot when it comes to fund selection and just one of the parameters that you (term audience as investor),. There’s a whole bunch of things that you should consider before selecting a fund for investment.

What is SIP | Why Should Invest in SIP?

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This is a continuation, or rather an extension of our previous article, what are mutual funds? If you are well aware about what mutual funds  are, how do they work, what are pros and cons of investing in mutual fund, Then you can go right ahead with this article, otherwise we would recommend reading the post about mutual funds, first clearing concept about mutual funds and then moving on here.

  1. What is SIP (Systematic Investment Plan)?

    SIP stands for Systematic Investment Plan. What it actually is nothing but a fancy word for EMI in savings. That’s right, have you heard the phrase, “boond boond se ghada bharta hai”. That’s exactly what it means. Just like when you don’t have enough water to fill the entire vase, but every single drop is an addition to make it full. But the subtle thing here is discipline, a continuous process of saving rather than just one shot of saving.

  2. Why Consider Systematic Investment Plan?

    SIP enforces you to make a habit of saving, and that’s a really good thing. We all have expenses, and we all get greedy sometimes. Oh! A sale is coming on Amazon, let’s buy that new smartphone, we’ll save next month. What? A new restaurant is opening, but short of funds, oh well! We can save money next month, so let’s try the restaurant first. What about that new Avengers movie that just launched? Or a trip to Kerala? So, for one reason or another, if we don’t make a habit, and more important, we don’t enforce that habit, then we skip the saving and our well will never get full.

    With SIP, you can set up an automatic system, that once every month (or every week, or based on any frequency that you select), that particular amount will be auto debited from your account and invested into the mutual funds of your choice, and basis the nav, a certain number of units will be  allocated to your account. So, once you set up the SIP, you don’t have to remember about saving, and it is automatically done on your behalf, forcing you into a habit of saving. Of course, you always have the option to manually pause or stop the SIP in case of some emergency, but you should not get into the habit of doing that as that would defeat the whole purpose of systematic saving.

  3. Systematic Investment Plan (SIP) vs One Time Investment

    You always have the option to invest/save all your money at once but that may not be as efficient as the other option. They both have their own use, and you can’t replace one with another. One time investment is the best option when you have a bunch of money and you want to invest all that in savings. But that does not mean you should not start a SIP, because as we just explained, SIP enforces a habit of saving. As units allocated to your demat account are based on the nav, averaging out over a period of time is more. Let’s understand with an example.

  • Principal -> Rs 10,000
  • Current Price -> Rs 500
  • Scenario one -> one time investment -> units allocated at once -> 20
  • Scenario two -> invest Rs 1000 per month
    • Month 1 ->
      • Price -> 500
      • Untis allocated -> 2
    • Month 2 ->
      • Price -> 550
      • Units allocated -> 1.82
    • Month 3 ->
      • Price -> 487
      • Units allocated -> 2.05
    • Month 4 ->
      • Price -> 440
      • Units allocated -> 2.27
    • Month 5  ->
      • Price -> 387 ->
      • Units allocated -> 2.58
    • Month 6 ->
      • Price -> 423
      • Untis allocated -> 2.36
    • Month 7 ->
      • Price -> 498
      • Units allocated -> 2.00
    • Month 8 ->
      • Price -> 530
      • Units allocated -> 1.88
    • Month 9 ->
      • Price -> 512
      • Units allocated -> 1.95
    • Month 10  ->
      • Price -> 490
      • Units allocated -> 2.04
  • Total units allocated => 2+1.82+2.05+2.27+2.58+2.36+2+1.88+1.96+2.04 = 20.96

As you can see, with one time investment, we get the units based on the price at that point, but when we spread out the money over a period of time in SIP, then we might get more units (of course, we could also get less units, if the price only goes up in the subsequent times, but as we suggested in our article about mutual funds, the SIP and mutual funds are a long term investment, and in the long term the price goes up and corrects in a pattern.

In conclusion, SIP is one of the best ways to start saving for the long term. Check out our article on how to start a SIP in zerodha.

What is Mutual Funds, All About Mutual Funds in Simple Words?

  1. What are mutual funds?

    Simply put, mutual funds are nothing but a savings tool, just like a lot others, FD, RD, LIC etc, that help you grow your investment much better than savings in a bank.

    In a more defined manner, as stocks are traded in the stock market. Mutual funds are a collection of certain stocks, so instead of picking stocks yourself, there’s a dedicated team of people who do the hard work for you, and create a portfolio of certain stocks, so you can then invest a certain capital and based on the NAV a certain number of units are allocated to your account, to understand better about nav and how units are allocated, do check out our article about nav.

    These were just simple definitions, let’s look at some of the more official definitions.

    Investopedia: “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.”

    Wikipedia
    : “A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities.”

    Not so intuitive, right? So, for now, let’s just stick to our definition of the mutual fund, and in the upcoming section we’ll get a much clearer picture of what they are and how they differ from other saving options.

  2. Why to invest in mutual funds?

    Now this is an important question and it will also help us understand what mutual fund are more clearly. What should you invest in mutual funds? As we have already seen there are multiple reasons not to keep your money sittle idle in your bank account. Mutual funds are one of the ways to diversify your portfolio, allowing you to get much better returns than you would ever have in your savings account.

    So, that’s it! To get more returns, and two diversify your portfolio.

    The first reason is pretty simple, everyone wants more return on their investment, so no need to explain that. But the second point about diversification, that is covered in more detail in our article, diversifying your portfolio. But even if you focus on the first point, without worrying too much about the second point for now, read on to what are the pros and cons of investing in mutual fund.

  3. Advantages and Disadvantages of Mutual Funds in India?

    Just like every coin has two sides, so there are pros and cons of mutual funds. We have covered the benefits already in the second point. But there are also certain things we need to be careful of when investing money in mutual funds. The biggest downside is that since most of the mutual funds are market based, if due to any reason, the market is falling down, and the mutual fund that you’ve purchased has some allocation in the shares which are decreasing, then it may impact the nav and you may result in loss. Then? What’s the solution? Well the solution is that mutual funds are more of a long term investment, so in the long run, (about 5 to 10+ years) mutual funds will give you more and better results in almost all of the cases. Again, we are not saying in all the cases, because anything that is related to the market can’t ever be 100% certain. But the probability of that worse case scenario is very minimal, and is extremely unlikely to happen. How unlikely? Click here to find out the times when markets had the most fall in history. But as is evident from today’s market, eventually the markets will rise up in the long term.

  4. Types of Mutual Funds:

    Mutual funds can be categorized based on many things, the lock in period, the type of area where money is invested.

    Based on structure:

    Open Ended -> No lock in period
    Closed Ended -> Units are locked for some time
    Interval funds -> A cross between open-ended and closed-ended funds

    Based on asset class:

    Equity funds -> Major investment is done in equity
    Debt funds -> Major investment is done in the debt sector, such as government bonds.
    Hybrid funds -> This is a hybrid approach where some of the investment is made in equity and some is invested in the debt market.

    Based on investment goals:

    Growth Funds -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    ELSS (Tax saving) -> Funds that invest primarily in high-performing stocks with the aim of capital appreciation are considered growth funds
    Liquidity-based funds -> Funds that are targeted towards maintaining liquidity so that there is no lock in period and units can be sold whenever cash is needed.

     

  5. How To Invest In Mutual Funds In India?

    There are various options to invest in mutual funds in India, from banks to brokerage houses. These days most of the banks have the option to directly invest in mutual funds. You can also open an account in zerodha, and start a SIP, or in any of the top brokers. Zerodha actually has a completely separate app for managing mutual funds, and that is coin, so is with many other brokers as well.They all may differ slightly in UI design, but the basic set of operations is the same. You open the app, search and select the mutual fund in which you want to invest, and place an order, that’s it! To check out a graphical tutorial of purchasing mutual funds or placing a SIP in zerodha and upstocks, check out our article here. 

  6. Best Mutual Funds To Invest In 2022 India.

    Best mutual funds in India, as per value research online:
    – SBI BLUE CHIP Fund (one of the best in growth, long term)
    – Axis Liquid Fund (one of the best in liquid funds)
    – Axis Long Term Equity (one of the best in ELSS/tax-saving)
    – Axis Gilt Fund (one of the best in debt fund)

6 Things To Consider Before Buying a Mutual Fund

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As we discussed in our previous articles, what are mutual funds, why should you invest in mutual funds, and what are some of the top performing funds in India. In this article we will focus on what are the parameters to look for before buying a mutual fund, and how they relate to performance and payout of a fund.

  1. Direct Plan’s vs Regular Plan’s:

    We have already covered this in our article, direct vs regular mutual fund, so if you want to get a detailed understanding of the topic, remember to check out that article, but we will cover the summary here. So, in short, with SEBI’s regulation reform for the direct plans, these days it is much more beneficial to invest in a direct plan, because the NAV is generally slightly higher than the regular plan and the expense ratio is slightly lesser, thus ending up more money in the hand of investor for the same amount invested.

    So, unless you plan on changing SIP frequency and relying on some advisory to provide you that input. It’s best to go with the direct plan because in the long run it would end up with more money in your portfolio. In case of regular plans, a certain amount of your profit is taken as commission by some third party.

  2. Mutual Funds Expense Ratio:

    This is one of the most important factors to consider when buying a mutual fund or starting a SIP, but is often the most neglected. We have covered this in depth in our article, “What is expense ratio in mutual funds’ ‘, do remember to check that out if you want to get a more in depth understanding of the subject. In simple terms, expense ratio is nothing but annual fees or annual maintenance charges (AMC) that you pay the fund house to manage the fund.

    With an example, let’s say if you invest Rs. 10,000 in a mutual fund that has an Expense ratio of 2%, it means that you are paying 10,000 X 2% = Rs 200 irrespective of your returns. So, if you get an annual return of say 10%, then after an expense ratio of 2%, the return effectively comes down to 8%. So if you were hoping that by 10% return on your investment of Rs 10,000, you would get Rs 1,000, but after 2% of expense ratio, you only get Rs 800 as Rs 200 is deducted as an AMC.

  3. CAGR – Compound Annual Growth Rate:

    We all know interest, right? Similarly, annual interest is interest computed annually. Now, CAGR is nothing but compounded annual interest in simple terms. It stands for Compound Annual Growth Rate, and it reflects how much actual return has your investment accrued over the timeframe you’ve invested it, compounded annually.One thing to note is that the compound annual growth rate isn’t a true return rate, but rather a representational figure.

    It is essentially a number that describes the rate at which an investment would have grown if it had grown at the same rate every year and the profits were reinvested at the end of each year. But by looking at it, you can understand the average returns of a fund over a time frame. To learn more about how it is calculated, and some live examples and comparison, do check out our article “What is CAGR in mutual funds”.

  4. Previous Performance:

    Fund’s previous performance is an outlook of how the fund has performed up until now, or rather, up until the time you are purchasing it. It doesn’t necessarily mean that the fund will behave the same in the coming time as well, but it does give you a general idea of the past performance. If there’s a fund that has always performed below it’s benchmark in the past, it is not guaranteed that it will perform badly in future as well, but it is likely that it might not outperform the benchmark by a huge amount. To check the past performance of any fund, click here.

  5. CRISIL Rank  – Credit Rating Information Services of India Limited:

    It is a subsidiary of American company S&P Global which provides ratings, research, and risk and policy advisory services for financial institutes and financial instruments. Now, to know more about CRISIL, and how it works to evaluate the ratings of funds and other financial institutions, do check out our article, “What is CRISIL”, but for now, we will focus on what these ranks are and what they mean.

    CRISIL assigns each fund a rating or a rank, from best to worst, RANK 1 to RANK 5, and in terms of stars, it’s the reverse, so from best to worst, it’s 5 STARS to 1 STAR. Ratings/ranking are based on different time frames, from 3 years, 5 years and 10 years. You can look at the ranking over a time frame and get a sense of how the fund has been evaluated by CRISIL.

  6. Exit Load on Mutual Funds:

    Exit load is a thing that doesn’t come into play at the starting of investment, or even during the investment, but as the name suggests only at the end, when you are exiting from the funds and redeeming your investment back (in profit or loss whatever is the case). Exit load is nothing but the fee that the Asset Management Companies (AMCs) charge investors at the time of exiting or redeeming their fund units. The exit fee is usually a percentage of the Net Asset Value (NAV) of the mutual fund units held by investors.

    Once the AMC deducts the exit load from the total NAV, the remaining amount gets credited to the investor’s account. For example, if the exit charge for a one-year scheme is 2% and you redeem within six months, then this would be much before the agreed investment period. If the NAV of the fund is Rs.35 during the time of redemption, then the exit fee would be 2% of Rs.35, which amounts to Rs.0.7.

    The remaining amount, Rs.34.30 gets credited to the investor. If the investor completes the agreed fund tenure, then he/she will not be charged the exit load at the time of redemption. If on the other hand, you withdraw your amount after the lock-in period is over, then there are no exit fees.

Conclusion

We’ve tried to cover a few of the common parameters to look for when purchasing mutual funds, but it can still be slightly confusing when you are doing a first time investment. So, for it we have tried to compile a list of best mutual funds to purchase, and we have also specified the reason as to why we believe they are best in the category, so that you don’t just go over our word, but get a better and practical understanding of which mutual funds to keep in your portfolio to get the best possible returns.