Basics of Mutual Funds NAV

Mutual Funds are one of the most growth-oriented financial tools available to customers. These funds not only ensure savings but also have high potential to grow your funds and offer high returns. Mutual funds are categorized into various types based on the nature of fund and their risk-return ratio.

More and more customers are opting for mutual funds considering the financial growth that they offer. Other regular investment tools are able to offer returns that are only enough to match the current inflation rate. On the other hand, mutual funds offer returns that are substantial enough and as such are able to cover the inflation effect as well as provide growth over and above that.

What is NAV in reference to mutual fund?

NAV is short form for Net Asset Value. NAV of a mutual funds represents the fund’s market value per share. This is the price at which the fund’s shares are bought by investors and sold to companies. NAV forms an important part of mutual fund basics for any investor, be it an amateur or a seasoned professional investor.

How is NAV of a fund calculated?

The Net Asset Value of any mutual funds is calculated by taking into account the total value of all securities and cash in a fund’s portfolio and then dividing it by the outstanding number of shares. NAV is computed every day at the end of the trading cycle. These computations are based on the closing market prices of the securities.

Importance of a mutual fund’s NAV

Here are some of the most important features and benefits of the Net Asset Value of any mutual fund.

• NAV helps calculate the price per unit of any share. For example an NAV of 60 million Dollars divided by 6 million shares outstanding will lead to a share price of $10.
• Net Asset Value is a term used mostly in context with open-ended mutual funds. This is because for open-ended funds, shares and interests are not traded between investors but are issued by the fund to investors depending upon their NAV. On the other hand, for close-ended funds, shares and interests are traded between investors and hence, the share and interests are priced at the final amount decided upon by the investors.
• NAVs point out the company’s current asset and liability holdings which makes it easier for investors to know the growth and risk prospects of any company.

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The Danger of Over-Diversifying in Mutual Fund Portfolio

There is an age old saying, “Don’t put all your eggs in the same basket.” This is basically the principle that a mutual fund follows when deciding where the money is actually invested. Sometimes mutual fund investors may take this theory to heart and invest in too many funds at the same time. While there is nothing wrong with doing this, there is one that you should watch out for and that is the danger of over diversification of the portfolio. With an over diversified portfolio you can find yourself in a situation where even investing in the best mutual funds in India will not provide returns to the tune you were hoping for.

Best Mutual Funds

What is over diversifying?

Let us take an example of an average person. This person has decided that he is going to invest Rs. 30,000 in mutual funds. When the time to invest comes, he takes a list of the top 10 mutual funds in India and invests Rs. 5,000 in 6 different mutual funds. This can be called an over diversified investments because the ideal number of investments he could have made with this amount should have been 1 or 2.

Why is over diversifying bad

There is no doubt that over diversified investments in mutual funds are bad and the reasons for this are:

• Can’t buy much: With a small investment, the returns too will be small since the invested amount will not be enough to buy too many units..

• Building wealth will take long: Since the invested amount is small, and the number of units bought through them is also small, when it comes time to see how much wealth has been built, there will be a lot of disappointment since the amount built won’t be significant enough to make a difference.

• Reduction in benefits: If one or two of the investments were made in tax saving mutual funds (ELSS) then the tax benefit available to the investor will be only Rs. 6,000 to Rs. 12,000 instead of Rs. 30,000.

• Small hits big damage: The very nature of mutual funds speaks of an inherent risk in the investment. When the invested amount is small, its capacity to sustain losses is reduced and even a small loss can do a lot of damage to the portfolio.

• Similar investment: There could be a chance that some of the mutual funds may be investing in the same company. This means that the whole purpose of diversifying to invest in different sectors or companies will be defeated.

• Expensive to pay for: Most mutual funds will charge an entry load and fund management charges. Will investments in 6 different funds, the service charges alone for our investor will end up losing him money.

• To many threads to track: When you invest in too many mutual funds, you are more than likely to find it reasonably tough to keep an eye on each and every one of them at the same time.

The fact is that there is no formula or magic number that can tell you how many mutual funds you can invest in. The decision must be made by you after you have understood how much money you have to invest and what sort of returns you can expect out of the investments. If you are still convinced that you want to invest in more than one fund then it would be best to consult a financial advisor who can help you decide on what to invest and where so that you can get the most out of your money.

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Why You Should Not Invest Just For The Sake of Tax Deduction

When the months of February and March come around there is a frantic race to invest in various instruments that will provide tax benefits but if you invest just for the sake of saving on taxes there is one thing you just missed on. That one this is the return from the investment. No one likes paying taxes but that is no reason to make rash decisions with your money, especially when it gets invested in an instrument with a lock-in period because once committed, they cannot be withdrawn till the lock-in period get over.  For example let’s take the example of investments in a tax saving fixed deposit vs a tax saving mutual fund. With one you get a safe environment for the money but not a particularly attractive interest rate and a 5 year lock-in. With the other you get an unsafe environment but also the chance for getting higher returns and a shorter lock-in period. Weighing the option is everything when it comes to tax deductions.

Tax Saving Mutual Fund

Why not to invest just for tax

Since weighing the options quintessential to proper investment planning, let’s take a look at what happens when this step is actually ignored.

Investing in the wrong instrument

Let’s say you need to invest another Rs. 8,000 before the financial year is over and you need that money for something else as well. You decide to take a term insurance policy of about Rs. 1 crore but you just did something wrong. You invested in an instrument that provides tax benefits but no returns if you survive the policy. Even if the investment was made in a return of premium policy, there was a chance that there would be some maturity benefit. But not with a term insurance.

Minimal return

Let’s say you wanted returns and tax saving and you ended up investing Rs. 1 lakh in a tax saving fixed deposit. You just made a bit of a mistake because of you had invested that money in a tax saving mutual fund or ELSS, you might have gotten better returns.

Not a sustainable investment

Let’s assume that you weighed your options and decided to invest in an ELSS or tax saving mutual fund. You decide to invest in lump sums and the amount you invest is Rs. 60,000 per year. You pay the first years Rs. 60 thousand but the next year you don’t have that kind of money but there is nothing that can be done because it needs to be paid. You just made an investment that is not sustainable.

Wasted investment

Let’s say you wish to invest in a health insurance policy and are looking for one thing and one thing only; and that is tax savings. You take a policy and one day fall ill and decide to you that policy but when you go to claim the benefits you realise that you have taken inadequate cover or a policy that is actually a co-pay policy where you have to pay part of the bill. You just wasted money on an investment that does not serve you at all.

Investment that earned loses instead of returns

This is something that can happen with tax saving investments that have a link to the markets like tax saving mutual fund, ULIPS and ELSS. You invest thinking you’ll get tax savings but realise that you invested without looking and now the investment is actually generating more losses than returns and you cannot sustain such losses. You just wasted money and forced yourself into a financial corner.

An investment made for tax saving can be anything you want. It can be a life insurance policy or a tax saving mutual fund or even a fixed deposit. But the thing you MUST do is, first understand what you are looking at and what you are buying!

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