Basic rule for investing in mutual fund

1. 2. WHY INVEST: To Beat Inflation & Achieve Financial Goals WHERE TO INVEST? Depend on your Investment Goals Short term goal -invest in short term instrument. Long term goal -invest in long term instrument The RISK-RETURN Trade-off: Low Risk=Low Return; High Risk=High Return. KNOW THE RISK: Rate if return is dependent on the amount of risk you assume. RISK WHEN CALCULATED BECOMES NO RISK, RISK BECOMES OPPORTUNITY increase your Intelligence such that it lowers the Risk. Invest according to goal: Kids Education, Retirement, Car all long-term, but why most of your investments are in short term instruments? Earn->Spend? Then save and invest BANK SAVING IS NOT INVESTING money that you can easily withdraw in small excuse or false emergencies gimmick, partying, sale, outing etc INVESTING IS A LONG-TERM COMMITMENT TO YOUR GOAL! Investing is not one-time its a habit, a long-term process of put & put, not put & take. -A commitment that you will not touch that money for other purpose! -A commitment to continuously invest until you get what you want!

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Mutual Fund Investing Dos and Dont

Investing directly in equities requires lots of knowledge and research about the stock before investing. Such investment decisions are high risk and high return game, if any investors do not have knowledge and experience and still wants to have higher risk adjusted return, mutual fund is the best way to invest in stock market.

Dos and don'ts while investing in mutual fund

1. Watch out for risk associated with mutual fund: some MF are very risky and therefore it is important to understand what is your risk capacity. Equities are riskier whereas the debts are less risky and MMMF are safest. However there is trade off between risk and return. High risk high return and vice versa. Some funds balance the risk and return by offering balance fund with mix of debt and equity (Hybrid Funds). Stay invested for longer period of time: Mutual fund investing is not about trading, it is about building wealth and portfolio. The minimum investment horizon should 3-5 years to have meaningful return. Do not sell when market falls and do not over buy when market is in uptrend. Buy low and sell high (Warren Buffet rule). The debt fund duration can lower as interest is capped for that period. Watch out for fees associated with mutual fund: MF investing attract various fees and loads. At present as per the SEBI guideline there is no entry load but mutual fund generally charges 1% exit load if funds are redeem before one year and no exit load if redeem after one year. Apart from this, there is annual maintenance fees between 1 to 2.5% of AUM depending upon the type of fund

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Always consider tax implication of your investment: Whenever an investors sell or receives any dividend or redemption proceed, it attract taxes. Redeeming the investing before one year attract 15% capital gain tax and after year not tax. So as an investor we need to asses our tax liability while redeeming the fund. Low NAV does not mean cheap mutual fund: It is popular misconception that low NAV means cheap mutaul fund. All the money accumulated either with NAV of Rs10 or Rs200 will have equal chance of growth according to proportion of their NAV. It is advisable to invest the fund with good track record of return and experience fund manager. Particulars Current NAV (Rs) Amount Invested (Rs) Units Credited (Numbers) 1 Year Growth in NAV New NAV (Rs) Fund Value After 1 Year (Rs) 1 Year Return Scheme 1 10 10,000 1,000 15% 12 11,500 15% Scheme 2 200 10,000 50 15% 230 11,500 15%

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Invest in fund with proven record: it is advisable to invest in existing mutual fund with proven record of 3-5 years. There are two advantages, expenses for exiting fund would lower and you know how its performance are in past. The new fund offerings (NFO) carries large initial promotional expenses which have to be born by investors which is not the case for existing investors. The new fund are yet to show their performance though past performance are not guaranteed in the future. Adopt a discipline and regular approach: always avoid investing lump sum amount and invest regularly and discipline manner. SIP is the best way to average out cost of acquisition of units. SIP will take care of market fluctuations and helps to invest smaller amount without exposing to larger risks. It will help to build wealth due to massive power of compounding. Do not try and time the market as no body knows which way market will behave, just invest regularly and build portfolio.

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8. Ideal mix of debt and equity: Based on risk appetite and length of investment horizon, one needs to decide the mix of debt and equity. The debt portion should increase once an investor is approaching towards retirement or goal. The mix should be adjusted regularly Quarterly / Half yearly / yearly.
9. Rebalance your portfolio: After deciding the ideal mix of debt and equity, one needs to rebalance it portfolio. During bad equity market, the money should be taken out and invested in debt and vice-versa. It will help to book profit at higher level and rebalance portfolio while. When market crash take out some debt money and invest in equity. The whole idea is that Buy low and sell at higher level.

10.Opt for online investment: If an investor has direct access to internet and online banking facilities, one can go for online investing. It will help to save lot of time in writing cheques, filling physical forms, visiting to AMC office etc. it help them to redeem or buy unit instantly without worrying about the delivery of physical form to AMC. Online also helps to scroll through the NAV of other scheme. 11.Avoid over diversification: it is always better to diversify the risk and portfolio but over diversification should be avoided. Just keep maximum 4-5 bet performing schemes. Ultimately the stocks and bond remain same for all the schemes.

12.Prefer large market cap fund: Large market cap company offer consistency in return and are low volatile stocks than mid/small market cap companies. Keep close watch on performance and redeem non-performer schemes.

Dos while investing in mutual fund

1. 2. 3. Read the offer document carefully before investing. Note that investments in Mutual Funds are risky. Mention your bank account number in the application form.

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Invest in a scheme depending upon your investment objective and risk appetite.
Note that Net Asset Value of a scheme is subject to change depending upon market conditions. Insist for a copy of the offer document/key information memorandum before investing.

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Note that past performance of a scheme is not indicative of future performance.

Past performance of a scheme may or may not be sustained in future. Keep track of the Net Asset Value of a scheme, where you have invested, on a regular basis. Ensure that you receive an account statement for the money that you have invested. Update yourself on the performance of the scheme on a regular basis. Peruse the annual reports and half yearly financial results of mutual funds. These are published in national newspapers and on websites of mutual funds. Find out about entry load & exit load in case of open-ended schemes and check for initial expenses & exit load in case of close-ended schemes. Actual expenses for each scheme are disclosed in half yearly results.

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Find out about the investment profile provided in portfolio disclosures which is available on half yearly basis. With assistance from sources of information like Scheme Offer documents, Key Information Memorandum, Statement of accounts, Annual and half yearly reports, portfolio disclosures etc., you are recommended to take informed investment decisions, not based on hearsay. Waiver of Entry Load is provided for Direct Applications. For investors wanting to make Applications for mutual fund schemes without a distributor/broker, should cut across the section on Distributor information in application form, mark it as Direct application and countersign. The waiver of Entry Load for Direct Applications is available for new applications and for switch-ins from one scheme to another. If an investor is seeking the help of a distributor, find out the value added services that are provided by distributor in respect of investments in mutual fund schemes. While making investment decisions, you, as investor, are expected to peruse the SID (Scheme Information Documents) and Key Information Memorandum (KIM). Take care to mention nominee/nominees in your application forms. Complete KYC requirements as per instructions on application form

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Dont While investing in mutual fund

1. 2. 3. 4. 5. 6. 7. 8. 9. Do not invest in a scheme just because somebody is offering you a commission or other incentive, gifts etc. Do not get carried away by the name of the scheme/Mutual Fund. Do not fall prey to promises of unrealistic returns. Do not forget to take note of risks involved in the investment. Do not hesitate to approach concerned persons and then the appropriate authorities for any problem. Do not deal with any agent/broker dealer who is not registered with Association of Mutual Funds in India (AMFI). Avoid herd mentality while buying / selling into mutual fund schemes. Dont leave out KYC details in your application forms. That will make the forms liable for rejection. Dont rush into making investments that do not match your risk taking appetite and investment goals.

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Investors should be wary of concentrating their mutual fund portfolio in one particular asset class and not diversifying across various types of scheme profiles

What is NAV or Net Asset Value?

The Net Asset Value is the funds share price. The NAV is calculated by dividing the current value of the portfolio by the number of fund units (shares) outstanding. NAV for most funds is calculated on daily basis and is available in daily financial papers. Usually for open ended scheme the NAV is calculated on daily basis and for close ended it is done on weekly basis. NAV is determined by the value of fund which in tern depends upon the performance of underline assets unlike share where the prices are depend upon the demand and supply of shares on stock exchange. For example if the underlining asset is gold, the NAV of that fund would depend upon the price movement of gold. Similarly other funds like real estate, currency, bonds, and commodities etc, NAV is depend upon the valued or price movement of respective assets. The NAV of a collective investment scheme is calculated by taking total value of the fund's portfolio (its assets) less its accrued liabilities (money owed to lending banks, fees owed to investment managers and service providers and other liabilities)

How is Mutual Fund NAV Different from Stock Prices?

Mutual Fund NAV seems similar to stock prices as they are both indicative of the price per unit or share. Both funds and shares can be bought on the basis of the unit price. However, there are some differences between a mutual fund NAV and stock price: The price of a stock is determined by company information - the performance of the company, public confidence in its services and other economic factors whereas the NAV is determine the value of fund. Mutual fund depends upon share but shares are not depending upon mutual fund. Shares are traded between investors and prices are determined by the demand and supply of shares but NAVs are not traded between investors and the prices are determined the value of fund driven by growth in prices of underline assets. NAVs are issued by the fund to each new investor and redeemed back to the fund when an investor withdraws.

Mutual fund NAV is calculated at the end of the day after the daily closure of stock markets. Therefore NAV changes only on a daily basis. Stock prices, however, change any time during the day during stock market trading hours.
Buying and selling of shares are instant but purchase and redemption in mutual funds are held at closing price.

Where to Find Mutual Fund NAV Quotes?

Mutual Fund NAVs are quoted in the fund literature including its websites, brochures and statements (electronic or print).

They are also quoted in major newspapers and in business sites which monitor mutual funds. Some mutual funds also have helplines to give information regarding the daily NAV.

How does a Mutual Fund NAV Fluctuate?

A Mutual fund NAV changes value under these conditions: Rise or drop in value of stock investments. Change in number of shares in the mutual fund. Payout of dividends and capital gains by the mutual fund to its investors.

Mutual Fund NAV after Dividend Payout A mutual fund pays out dividend to its investors who have opted for the dividend plan. In such cases, the NAV of the mutual fund falls according to the amount of dividend paid. For example, if the NAV of a mutual fund on 10 July 2010 was Rs10 and if scheme has declared Rs2 per unit as dividend on July 11 the NAV of the mutual fund would fall to Rs8. The cash obtained by the investor can be reinvested to buy more shares of the mutual fund at lower value. Some investors who seek pure capital appreciation may opt for an aggressive growth fund, without dividend payments. The returns then would be solely based on the mutual fund NAV appreciation.

Calculation of NAV
NAV is calculated by dividing the value of asset by number of outstanding units. Formula: Market Value of Investment (Fund Value) + Receivable + Other Accrue Income + Other Assets Accrue expenses Other Payable Other Liabilities. Divided by number of outstanding units. In short the NAV is Net asset value per share = Net Asset Value / Total Outstanding Units Net Asset Value = Total Assets Total Liabilities. Market value of the investment is determined as per the last traded or closing price of the securities. Accrued income is dividend and interest received. Other assets include Cash and Cash equivalent. If value of NAV is high it does not mean that units are overpriced.

NAV Calculation
Scheme Scheme Size Face Value No. of Units O/s XYZ Rs 50 crore Rs10 5 Crore

Market Value
NAV

75 Crore
15 (75/5)

Example
What is the NAV of a scheme in which market value of investment is Rs 700 crore and liabilities is Rs50 lakh whereas the total number units outstanding is 28 crore? The Answer is (700-0.5)= 699.5/28=Rs24.98

An open ended scheme with 20000 units has following items in its balance sheet Investment market value Other Assets Current Liabilities Rs2 Lkah Rs0.4 Lakh Rs0.5 Lakh

Calculate NAV?

Change in NAV
If NAV of a scheme was Rs20 at the beginning of the year and after 16 months the NAV is Rs22, what is annualized percentage change in NAV? If NAV of a scheme was Rs16 at the beginning of the year and after 13 months the NAV is Rs22, what is annualized percentage change in NAV?

With following information's, calculate NAV

Unit Capital (FV Rs10) Investment Market Value Other Assets Other Liabilities Issue Exp. Not written off Reserve Rs20000 Rs50000 Rs7000 Rs4000 Rs1000 Rs34000

Liabilities

Assets

Capital
Reserve Other Liab. Total

20,000 Investment Value

34,000 Other Assets 4,000 Issue Exp. Not W/off 58,000

50,000
7,000 1,000 58,000

Total Net worth is (Capital + Reserve) = 20,000 + 34, 000 = 54,000 Total Units = Capital / FV = 20,000/10 = 2,000

NAV = Net worth / Units outstanding

=54000/2000 = 27 Or in simple (Total Assets Liability = Net Worth) 58000-4000 = 54,000