Wednesday, February 4, 2015

Mutual Funds (MF)

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Suppose you have surplus money after your monthly expenses. Now you want to invest those money to earn a good profit. But the problem is you don't know where and how much to invest, and you don't know the risks involved in buying shares. Even you may not know which company is better than other and less riskier to invest. In general, you may not have sufficient expertise in investment.

So it is better to seek help of some expert, than taking risk of self investment. Here comes the job of a Mutual Fund (MF). MFs are managed by professionals, who know very well where and how much to invest (as they are experienced in this field, but you are not, your expertise is elsewhere).

Mutual Fund pools money from several investors and then invests those money categorically to several investment securities, like stocks, bonds, short-term money market instruments, precious metals (e.g., gold), etc.

You will invest in a Mutual Fund (MF), and will forget about it. Professionals will manage the investments, and you will get your return after a certain period of time. You don't require to pay constant attention, you just let the portfolio manager (professional) make essential decisions for you.

Also, note that there is another reason for you to invest in MF - you have tax saving options on return amount, if you invest in a Mutual Fund.

MF structure
An MF is set up in the form of a trust that has a Sponsor, Trustees, Asset Management Company (AMC).

  • Sponsor - The trust is established by a sponsor (you can think it, like a promoter of a company). The Trust needs to be registered with SEBI (regulator of Capital Market).
  • Trustees - Trustees hold property of MF for the benefit of unit holders (you are one of those unit holders)
  • Asset Management Company (AMC) - AMCs manage the fund and makes investment in various types of securities (you don't need to take decisions, they will). AMCs should be approved by SEBI.
Note that, the trustees have the authority to provide direction over the AMC, and they monitor the performance and compliance of SEBI rules and regulations by the mutual fund.

Net Asset Value (NAV)
NAV is the total value of fund assets, excluding liabilitiesper unit of the fund, which is calculated by the Asset Management Company (AMC) after every business day. This is also known as bid value. It represents an MF's per share market valueInvestors buy fund shares at this price  (bid price, or NAV). 

NAV = (Current market value of all Assets - all Liabilities) / no. of unit outstanding shares

For an example, suppose an MF has assets of Rs. 100 lakh and liabilities of Rs. 20 lakh, and has total 4 lakh shares outstanding. Then the NAV or bid price (price per share value) would be
(100 - 20) / 4 = Rs. 20 per share

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Happy learning!

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