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Basic rule for investing in mutual fund
1. WHY INVEST: To Beat Inflation & Achieve Financial Goals2. WHERE TO INVEST? Depend on your Investment Goals
Short term goal -invest in short term instrument. Long term goal -invest inlong term instrument
3. The RISK-RETURN Trade-off: Low Risk=Low Return; High Risk=HighReturn.
4. KNOW THE RISK: Rate if return is dependent on the amount of risk youassume. RISK WHEN CALCULATED BECOMES NO RISK,RISK BECOMES OPPORTUNITY increase your Intelligence such that itlowers the Risk.
5. Invest according to goal: Kids Education, Retirement, Carall long-term, but why most of your investments are in short terminstruments?
6. Earn->Spend? Then save and invest7. BANK SAVING IS NOT INVESTING money that you can easily withdraw
in smallexcuse or false emergencies gimmick, partying, sale, outing etc8. INVESTING IS A LONG-TERM COMMITMENT TO YOUR GOAL!
Investing is not one-timeits a habit, a long-term process of put & put, notput & take.
-A commitment that you will not touch that money for other purpose!-A commitment to continuously invest until you get what you want!
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Mutual Fund Investing Dos and Dont
Investing directly in equities requires lots of knowledgeand research about the stock before investing.
Such investment decisions are high risk and high return
game, if any investors do not have knowledge andexperience and still wants to have higher risk adjustedreturn, mutual fund is the best way to invest in stockmarket.
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Dos and don'ts while investing in mutual fund
1. Watch out for risk associated with mutual fund: some MF are very
risky and therefore it is important to understand what is your risk capacity.Equities are riskier whereas the debts are less risky and MMMF aresafest. However there is trade off between risk and return. High risk highreturn and vice versa. Some funds balance the risk and return by offeringbalance fund with mix of debt and equity (Hybrid Funds).
2. Stay invested for longer period of time: Mutual fund investing is not
about trading, it is about building wealth and portfolio. The minimuminvestment horizon should 3-5 years to have meaningful return. Do notsell when market falls and do not over buy when market is in uptrend. Buylow and sell high (Warren Buffet rule). The debt fund duration can loweras interest is capped for that period.
3. Watch out for fees associated with mutual fund: MF investing attract
various fees and loads. At present as per the SEBI guideline there is noentry load but mutual fund generally charges 1% exit load if funds areredeem before one year and no exit load if redeem after one year. Apartfrom this, there is annual maintenance fees between 1 to 2.5% of AUMdepending upon the type of fund
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4. Always consider tax implication of your investment: Whenever aninvestors sell or receives any dividend or redemption proceed, it attracttaxes. Redeeming the investing before one year attract 15% capital gain taxand after year not tax. So as an investor we need to asses our tax liability
while redeeming the fund.
5. Low NAV does not mean cheap mutual fund: It is popular misconceptionthat low NAV means cheap mutaul fund. All the money accumulated eitherwith NAV of Rs10 or Rs200 will have equal chance of growth according toproportion of their NAV. It is advisable to invest the fund with good track
record of return and experience fund manager.
Particulars Scheme 1 Scheme 2
Current NAV (Rs) 10 200
Amount Invested (Rs) 10,000 10,000
Units Credited (Numbers) 1,000 50
1 Year Growth in NAV 15% 15%
New NAV (Rs) 12 230
Fund Value After 1 Year (Rs) 11,500 11,500
1 Year Return 15% 15%
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6. Invest in fund with proven record: it is advisable to invest inexisting mutual fund with proven record of 3-5 years. There aretwo advantages, expenses for exiting fund would lower and youknow how its performance are in past. The new fund offerings(NFO) carries large initial promotional expenses which have to beborn by investors which is not the case for existing investors. Thenew fund are yet to show their performance though pastperformance are not guaranteed in the future.
7. Adopt a discipline and regular approach: always avoidinvesting lump sum amount and invest regularly and disciplinemanner. SIP is the best way to average out cost of acquisition ofunits. SIP will take care of market fluctuations and helps to investsmaller amount without exposing to larger risks. It will help to build
wealth due to massive power of compounding. Do not try and timethe market as no body knows which way market will behave, justinvest regularly and build portfolio.
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8. Ideal mix of debt and equity: Based on risk appetiteand length of investment horizon, one needs to decide
the mix of debt and equity. The debt portion shouldincrease once an investor is approaching towardsretirement or goal. The mix should be adjusted regularlyQuarterly / Half yearly / yearly.
9. Rebalance your portfolio: After deciding the ideal mixof debt and equity, one needs to rebalance it portfolio.During bad equity market, the money should be takenout and invested in debt and vice-versa. It will help tobook profit at higher level and rebalance portfolio while.When market crash take out some debt money andinvest in equity. The whole idea is that Buy low and sellat higher level.
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10.Opt for online investment:
If an investor has direct access to internet and onlinebanking facilities, one can go for online investing. It
will help to save lot of time in writing cheques, fillingphysical forms, visiting to AMC office etc. it help themto redeem or buy unit instantly without worrying aboutthe delivery of physical form to AMC. Online alsohelps to scroll through the NAV of other scheme.
11.Avoid over diversification:it is always better to diversify the risk and portfoliobut over diversification should be avoided. Just keepmaximum 4-5 bet performing schemes. Ultimately the
stocks and bond remain same for all the schemes.12.Prefer large market cap fund:
Large market cap company offer consistency in returnand are low volatile stocks than mid/small market capcompanies. Keep close watch on performance andredeem non-performer schemes.
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Dos while investing in mutual fund
1. Read the offer document carefully before investing.
2. Note that investments in Mutual Funds are risky.
3. Mention your bank account number in the application form.
4. Invest in a scheme depending upon your investment objective andrisk appetite.
5. Note that Net Asset Value of a scheme is subject to changedepending upon market conditions.
6. Insist for a copy of the offer document/key informationmemorandum before investing.
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6. Note that past performance of a scheme is not indicative of futureperformance.
7. Past performance of a scheme may or may not be sustained infuture. Keep track of the Net Asset Value of a scheme, where youhave invested, on a regular basis.
8. Ensure that you receive an account statement for the money thatyou have invested.
9. Update yourself on the performance of the scheme on a regularbasis. Peruse the annual reports and half yearly financial resultsof mutual funds. These are published in national newspapers andon websites of mutual funds.
10. Find out about entry load & exit load in case of open-endedschemes and check for initial expenses & exit load in case ofclose-ended schemes. Actual expenses for each scheme aredisclosed in half yearly results.
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11. Find out about the investment profile provided in portfolio disclosureswhich is available on half yearly basis. With assistance from sources ofinformation like Scheme Offer documents, Key InformationMemorandum, Statement of accounts, Annual and half yearly reports,portfolio disclosures etc., you are recommended to take informed
investment decisions, not based on hearsay.
12. Waiver of Entry Load is provided for Direct Applications. For investorswanting to make Applications for mutual fund schemes without adistributor/broker, should cut across the section on Distributorinformation in application form, mark it as Direct application andcountersign. The waiver of Entry Load for Direct Applications is available
for new applications and for switch-ins from one scheme to another.
13. If an investor is seeking the help of a distributor, find out the value addedservices that are provided by distributor in respect of investments inmutual fund schemes.
14. While making investment decisions, you, as investor, are expected toperuse the SID (Scheme Information Documents) and Key InformationMemorandum (KIM). Take care to mention nominee/nominees in yourapplication forms. Complete KYC requirements as per instructions onapplication form
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Dont While investing in mutual fund1. Do not invest in a scheme just because somebody is offering you a commission or
other incentive, gifts etc.
2. Do not get carried away by the name of the scheme/Mutual Fund.
3. Do not fall prey to promises of unrealistic returns.
4. Do not forget to take note of risks involved in the investment.
5. Do not hesitate to approach concerned persons and then the appropriateauthorities for any problem.
6. Do not deal with any agent/broker dealer who is not registered with Association ofMutual Funds in India (AMFI).
7. Avoid herd mentality while buying / selling into mutual fund schemes.
8. Dont leave out KYC details in your application forms. That will make the formsliable for rejection.
9. Dont rush into making investments that do not match your risk taking appetite and
investment goals.10. Investors should be wary of concentrating their mutual fund portfolio in one
particular asset class and not diversifying across various types of scheme profiles
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What is NAV or Net Asset Value?
The Net Asset Value is the funds share price. The NAV is calculated by
dividing the current value of the portfolio by the number of fund units(shares) outstanding.
NAV for most funds is calculated on daily basis and is available in dailyfinancial papers. Usually for open ended scheme the NAV is calculated ondaily basis and for close ended it is done on weekly basis.
NAV is determined by the value of fund which in tern depends upon theperformance of underline assets unlike share where the prices are dependupon the demand and supply of shares on stock exchange.
For example if the underlining asset is gold, the NAV of that fund woulddepend upon the price movement of gold. Similarly other funds like real
estate, currency, bonds, and commodities etc, NAV is depend upon thevalued or price movement of respective assets.
The NAV of a collective investment scheme is calculated by taking totalvalue of the fund's portfolio (its assets) less its accrued liabilities (moneyowed to lending banks, fees owed to investment managers and serviceproviders and other liabilities)
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How is Mutual Fund NAV Different from StockPrices?
Mutual Fund NAV seems similar to stock prices as they are both indicative of the
price per unit or share. Both funds and shares can be bought on the basis of the unitprice.
However, there are some differences between a mutual fund NAV and stock price:
The price of a stock is determined by company information - the performance of thecompany, public confidence in its services and other economic factors whereas the
NAV is determine the value of fund. Mutual fund depends upon share but shares arenot depending upon mutual fund.
Shares are traded between investors and prices are determined by the demand andsupply of shares but NAVs are not traded between investors and the prices aredetermined the value of fund driven by growth in prices of underline assets. NAVsare issued by the fund to each new investor and redeemed back to the fund when aninvestor withdraws.
Mutual fund NAV is calculated at the end of the day after the daily closure of stockmarkets. Therefore NAV changes only on a daily basis. Stock prices, however,change any time during the day during stock market trading hours.
Buying and selling of shares are instant but purchase and redemption in mutual fundsare held at closing price.
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Where to Find Mutual Fund NAV Quotes?
Mutual Fund NAVs are quoted in the fundliterature including its websites, brochuresand statements (electronic or print).
They are also quoted in major newspapersand in business sites which monitor
mutual funds. Some mutual funds alsohave helplines to give informationregarding the daily NAV.
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How does a Mutual Fund NAV Fluctuate?
A Mutual fund NAV changes value under these conditions: - Rise or drop in value of stock investments.
Change in number of shares in the mutual fund.
Payout of dividends and capital gains by the mutual fund to its investors.
Mutual Fund NAV after Dividend Payout
A mutual fund pays out dividend to its investors who have opted for the dividend plan.In such cases, the NAV of the mutual fund falls according to the amount of dividend
paid.
For example, if the NAV of a mutual fund on 10 July 2010 was Rs10 and if schemehas declared Rs2 per unit as dividend on July 11 the NAV of the mutual fund wouldfall to Rs8. The cash obtained by the investor can be reinvested to buy more shares
of the mutual fund at lower value.
Some investors who seek pure capital appreciation may opt for an aggressive growthfund, without dividend payments. The returns then would be solely based on themutual fund NAV appreciation.
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Calculation of NAVNAV is calculated by dividing the value of asset by number of outstanding units.Formula:
Market Value of Investment (Fund Value)+ Receivable+ Other Accrue Income+ Other Assets- Accrue expenses
- Other Payable- Other Liabilities. Divided by number of outstanding units.
In short the NAV is Net asset value per share = Net Asset Value / TotalOutstanding Units
Net Asset Value = Total Assets Total Liabilities.Market value of the investment is determined as per the last traded orclosing price of the securities.
Accrued income is dividend and interest received. Other assets includeCash and Cash equivalent.
If value of NAV is high it does not mean that units are overpriced.
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NAV Calculation
Scheme XYZ
Scheme Size Rs 50 crore
Face Value Rs10
No. of Units O/s 5 Crore
Market Value 75 Crore
NAV 15 (75/5)
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Example
What is the NAV of a scheme in whichmarket value of investment is Rs 700 croreand liabilities is Rs50 lakh whereas the
total number units outstanding is 28 crore?
The Answer is (700-0.5)= 699.5/28=Rs24.98
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An open ended scheme with 20000 units
has following items in its balance sheet
Investment market value Rs2 Lkah
Other Assets Rs0.4 Lakh
Current Liabilities Rs0.5 Lakh
Calculate NAV?
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Change in NAV
If NAV of a scheme was Rs20 at thebeginning of the year and after 16 monthsthe NAV is Rs22, what is annualized
percentage change in NAV?
If NAV of a scheme was Rs16 at the
beginning of the year and after 13 monthsthe NAV is Rs22, what is annualizedpercentage change in NAV?
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With following information's, calculate NAV
Unit Capital (FV Rs10) Rs20000
Investment Market Value Rs50000
Other Assets Rs7000Other Liabilities Rs4000
Issue Exp. Not written off Rs1000
Reserve Rs34000
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Liabilities Assets
Capital 20,000 Investment Value 50,000
Reserve 34,000 Other Assets 7,000
Other Liab. 4,000 Issue Exp. Not W/off 1,000
Total 58,000 58,000
Total Net worth is (Capital + Reserve) = 20,000 + 34, 000 = 54,000
Total Units = Capital / FV = 20,000/10 = 2,000NAV = Net worth / Units outstanding
=54000/2000 = 27
Or in simple (Total Assets Liability = Net Worth) 58000-4000 = 54,000
