Mutual Funds, NAV & SIP - Simplified
Mutual Funds - Plan your investments for children education, marriage, retirement and new house by investing in Mutual Funds (MF). Make investments based on your financial goals and investment objective to be achieved over a certain period of time.
What is Mutual Fund (MF)?
A Mutual Fund collects money from multiple investors and invests them in different baskets of investments on your behalf. This basket of investments can be either stocks or debt instruments. It can be further classified as equity funds, debt funds and money market funds on the basis of where the investment has been made. Each one of these funds has its own advantage. Mutual Funds are ideal for anyone who is not aware of investment techniques. A mutual fund scheme is chosen based on your financial goal and investment objective for good returns over a certain period of time.
Ways to Invest in Mutual Fund
There are two ways to invest in mutual fund which includes Lump Sum Investment Plan and Systematic Investment Plan (SIP):
Lump Sum Investment Plan - It requires investors to invest in the fund at one go. More number of units can be bought on the first day of investment using this plan as compared to SIP. This type of investment method is preferable for experienced or aggressive investors. It has several benefits including investment of big amount, more convenient as the payment is made at once without any worry for future payments and it is ideal for long term horizons of about 10-12 years.
Systematic Investment Plan (SIP) – Unlike Lump Sum Investment, SIP involves investing of money at regular intervals over a specific period of time. Investment amount and date are predefined at the start of SIP scheme. With SIP plan you can invest as low as Rs. 500, hence it is highly recommended for salaried individuals or investors with low income. SIP plans are less risky and more flexible as compared to Lump Sum Investments.
SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme. SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. The biggest advantage of SIP is that one need not time the market. In timing the market, one can miss the larger rally and may stay out while markets were doing well or may enter at a wrong time when either valuation have peaked or markets are on the verge of declining. Rather than timing the market, investing every month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance.
Advantages of SIP
Investment Discipline – A fixed amount of money is auto-debited from your bank account and invested into a specific mutual fund scheme. Small amount of savings is done on the monthly basis without straining yourself.
Less Risks – More units are bought when market is up and lesser when market is on decline. SIP involves less amount of risks as the investment is done at regular intervals.
Easy Investment – Once the initial formalities are done, a fixed amount of money will be automatically deducted from your account on the predefined date. This saves you from doing manual investment every month.
Money Flexibility – SIP has low investment amount and various intervals of payment which makes it flexible for investors. Automatic deduction can be done on the basis of investor’s income flow. Also, it helps to save a good amount of money over a period of time without any financial pressure.
Initially, mutual fund investors are often confused about the concept of Net Asset Value (NAV) of a mutual fund scheme. However, the concept of mutual fund NAV is fairly simple.
Mutual fund NAV is the net asset value of a fund. It is a value per unit of a scheme on a particular business day. In short it is a price per unit of a scheme. If an investor wants to ascertain value of his portfolio, he can multiply the NAV of the mutual fund with the total number of units that he has acquired.
Basically a mutual fund’s NAV is the sum of all its assets (the value of its holdings in cash, shares, bonds, financial derivatives and other securities) less any liabilities, all divided by the number of shares outstanding.
It’s essentially an indication of the fair value of a single share of the fund. It offers investors a reference point around which they can gauge any offers to buy or sell shares of the fund.
How to Calculate Mutual Fund NAV?
It helps you to calculate the simple returns on your initial investment. What you need is only the initial and the current or the ending net asset value (NAV) of the mutual fund scheme. In calculating the point-to-point or absolute return, the holding time does not play a role.
Calculation of MF NAV assets usually fall under two categories – securities & cash. Securities, here, include both bonds and stocks. Therefore, the total asset value of a fund will include its stocks, cash and bonds at market value. Dividends and interest accrued and liquid assets are also included in total assets. Also, liabilities like money owed to creditors, and other expenses accrued are also included.
Now the formula is: Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units) Here:
Assets = Market value of mutual fund investments + Receivables + Accrued Income Debts = Liabilities + Expenses (accrued) The market value of the stocks & debentures is usually the closing price on the stock exchange where these are listed.
Mutual fund investment help you to grow your money and reach different financial goals. The earlier you begin planning, the greater your potential return on investment.
One of the key advantages of a Mutual Fund investment is that you can simply invest a fixed amount of money every month and achieve your desired savings. That is achieved by planning your SIPs regularly. Investments can be done on a monthly, quarterly or semi-annual basis, which increases the chances of buying units when prices are low. It is also always advisable to chart out your long-term investment goals. And Systematic Investment Plans work best for long term investments as they benefit the investor to gain good returns over a period of time.
Mutual funds can be considered baskets of investments. Each basket holds dozens or hundreds of security types, such as stocks or bonds. Therefore, when an investor buys a mutual fund, they are buying a basket of investment securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. You can manage your risk with diversified portfolio as it holds a variety of investments which can make it easier for investors to diversify than through ownership of individual stocks or bonds. Also, it is professionally managed by fund managers because in many cases investors don’t have the required expertise or correct information about certain mutual fund schemes or that extra time to spend on investments.
Furthermore traditional investing instruments come with long lock-in periods which makes it hard for you to get your money out, in times of emergencies. On the other hand, Mutual fund investments broadly come with less, if not no, lock-in periods and this is one of the important points to consider when investing in mutual funds.