MUTUAL FUNDS

Mutual funds are essentially a basket of many financial instruments that generate returns over a
period of time. If an investor invests in a mutual fund scheme, s/he buys units of that scheme
based on the Net Asset Value (NAV) of that fund on the day of the transaction.

The fund manager invests the collected funds in various financial instruments, such as equity
stocks, debt instruments, derivatives, arbitrage, etc to generate returns for the portfolio holders.
The total capital gains from these allocations get added to the assets under management of the
fund, on which the NAV of the fund depends.

The investors can redeem the fund units as per their convenience. The units are redeemed on the
current NAV of the fund, which would have probably be substantially higher when compared to
the NAV at which the units were bought. This increase highlights your total gains on the
investment. If the NAV at the time of redemption is not much higher than at the time of
investment, it is suggested to remain invested in the fund, and wait for the market sentiment to
move in your favor. The performance of mutual fund can be better be understood by the diagram
below.
MUTUAL FUND SCHEMES

Scheme Name Growth NAV Dividend NAV Min. Exit load

investment
Mirae assets 70.57 19.714 1000 1% for 365 days.
large capital
fund
ICICI 44.74 16.2 100 1% for 365 days.
Prudential
Advantage
funds
Axis mid cap 55.15 29.56 500 For the units in excess
funds of 10% of the
investment.1% will be
charged for redemption
within 12 months
Motilal oswal 29.20 17.13 500 1% if redeemed within
focused 25 fund 15 days.
Tata Ethical 245.354 92.26 500 1% will be charged for
fund. redemption within 12
months.

Factors affecting NAV

Interest: Interest income decreases the value of NAV.

Dividend: When a Mutual Fund pays out a dividend, the NAV of the fund reduces. Mutual Fund
dividends work on a redemption basis. The amount of reduction in the NAV is directly
proportional to the percentage of dividend paid out.

Positive and negative realized gains: A fund realizes a capital gain every time it sells an
investment for more than its purchase price. A fund may also have a capital loss when it sells an
investment for less than it paid for it.These capital gains distributions are the result of the fund
selling shares in stocks that have appreciated. If the fund manager decides to sell a stock due to
the changing outlook for the stock, or even if the fund must simply raise cash for shareholder
redemptions (if a shareholder sells shares of the fund), if the stock is trading higher than when
the fund initially purchased it, the fund must distribute at least 95% of the gains to shareholders.

Valuation loss: Valuation loss shall create a deterioration in NAV when its realized. It would be
less than expected returns.

Scheme expense: For a regular equity fund, the expense ratio is capped at 2.5% with some
leeway given for investments brought in from small towns. The expense ratio continuously
impacts the NAV of a fund. Every day, the published NAV is net of the expense ratio, i.e., the
expense is debited from the fund on a daily basis and the NAV is adjusted (decreased) to reflect
this debit. It should be noted that by doing it this way, an investor would pay the cost of
investing in a fund in proportion to the number of days she is invested in the fund. For instance,
if an investor invests in a fund for six months, then the charges incurred will be half the annual
expense ratio for the fund.