Let us start by understanding the basic concept of mutual funds investment:
- Many investors with common financial objectives pool their money.
- Investors, on a proportionate basis, get mutual fund units for the sum contributed to the pool.
- The money collected from investors is invested into shares, debentures and other securities by the fund manager.
- The fund manager realises gains or losses, and collects dividends or interest income.
- Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them.
What Is Net Asset Value?
- NET ASSET VALUE is the market value of the assets of the scheme less its liabilities. It indicates the real worth of a scheme. NAV per unit represents the worth of each unit that investors hold.
- These units have a value based on the assets in the scheme. This is comparable to the book value of a share of a company. This value is called NAV.
- A scheme’s NAV is variable in nature and keeps changing on a day to day basis. This happens because there are changes in the investment holdings (shares bought & sold daily & the market value of existing holdings change daily).
- A rise in the NAV is profitable and a fall depicts a loss in the value of units. NAVs are calculated and disclosed by the fund houses daily in newspapers and on the internet.
- NAV per unit = (Securities held by the fund – Liabilities) / No. of units allotted to investors
Advantages of Investing In Mutual Funds:
- PROFESSIONAL MANAGEMENT: Mutual funds hire professional managers who are skilled & experienced, thus they select suitable investments for investors.
- DIVERSIFICATION: As the mutual funds allocate their funds into different shares & stocks, the risk is diversified as all stocks don’t decline at the same time & in the same proportion.
- LIQUIDITY: A mutual fund investment can be purchased and sold quickly. This is often not true of individual shares and debentures. Thus, high liquidity is offered.
- WELL REGULATED: All mutual funds have to be registered with SEBI & they function within the provisions of regulations designed to protect the interest of investors.
Disadvantages of Investing In Mutual Funds:
- COSTS: The investor in a mutual fund has to pay various costs-load on entry & exit, management fee etc.
- UNCERTAINTY OF RETURNS: Dividend payouts can vary. Sometimes there may not be any dividend.
- LACK OF CONTROL: Fund manager decides what to invest & where, you have no control over the decision.
A Brief History of Mutual Funds:
- The formation of Unit Trust of India marked the evolution of the Indian mutual fund industry in the year 1963. The primary objective at that time was to attract the small investors and it was made possible through the collective efforts of the Government of India and the Reserve Bank of India.
- In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India.
- The Union Budget in 1999 exempted all dividend incomes in the hands of investors from income tax.
- In February 2003, the UTI Act was stripped of its Special legal status as a trust formed by an Act of Parliament. The primary objective behind this was to bring all mutual fund players on the same level.