Imagine a situation where you go to a restaurant alone - you will be able to try one or two dishes at the most. There will be no guarantee that the dishes you choose are to your liking, and since you’re alone it’s unlikely that you finish the ones on your table or can afford to order too many dishes.
But imagine that you go to the same restaurant with 6 of your friends. Amongst the 6 of you, you could order and share 6 times the number of dishes at the same price per person. Now you have 12 different dishes to try. What's more, you can get the expert waiter or the chef to advise you on what to order, considering he seems to be eating there everyday. Even if a few don’t work out to your liking, you have more dough on your platter to choose from. At the same price, at the same level of appetite, ordering in a group is more beneficial to everyone than it is for any of you to do so individually, more so with the help of an expert. This is the founding principle of a Mutual Fund. And there are many types of mutual funds in the Indian market.
New entrants to the equity markets have limited knowledge of the stocks. In such a situation, it is better to band together and invest with the help of an expert. The Indian markets provide this option for financial institutions to form funds by accepting money from multiple individuals and then investing the lump sum in the equity, bond and money markets, based on the different types of mutual funds.
Mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus based on the types of mutual funds you select to invest in.
You can choose from the different types of mutual funds
Diversified equity funds
Equity-linked savings schemes
Sector funds like Auto, Health Care, FMCG, IT, Banking, etc.
Mixed/Balanced funds for those who aren't comfortable with just equity based funds
Follow these steps while investing in different types of Mutual Funds
Why mutual funds? Right from Greek Euro crisis to the bad monsoons, from the price of potatoes to the war against terror, all sorts of factors have an impact on the equity market - we neither follow all the developments nor understand their impact. That is why an expert is required. These experts are professional money managers who are regulated by Government norms and hence give us the ability to analyze and evaluate their track records. The structuring of an investment portfolio is like creating the perfect thali at the dhaba - while we understand what goes into a thali, we don’t know how different levels of risk and reward are achieved through different stocks. That is why an expert is needed to build a robust portfolio that secures us from too much risk and yet offers us big rewards.
Selecting from the different types of mutual funds - Today many websites and magazines offer performance statistics, fund fact sheets, quarterly news, etc. on all the types of mutual funds in the market. This knowledge should be used to understand which fund matches your risk appetite. While evaluating the funds, also look for consistency in delivering the stated objectives in their past performance. Like one would diversify their equity investments, one should also diversify mutual fund investments so as to spread the risk further. Fund charges are also substantial so consider them while choosing a fund.
Investing and follow up - Simply making the investment isn't enough. It’s vital to track the fund's performance regularly. A thorough review once every quarter is the most minimum requirement. You might also need to sell your investment in the fund if there is a change in your investment plan or a change in the fund's strategy or it continues to give poor returns over a long period of time.
What is Net Asset Value?
The net asset value (NAV) is usually used in mutual fund for describing the value of funds of assets and less the value of liabilities. It is also referred as net book value or book value and the term may also be used in many places in different meanings. Net asset value is mostly used in mutual fund to signify total value of the portfolio of the fund less its liabilities.
For mutual fund, the liabilities may be the owed money to investment trustees and managers. Mutual fund and unit trust companies will divide the NAV with total outstanding units in order to get the net asset value per share. This will then be the selling price for the mutual fund before adding any fees and charges.
The net asset value per share for mutual fund is daily calculated in the closing market price reflecting the value change.