5 must-know concepts

Glance through these 5 basic concepts on mutual funds and flaunt your knowledge amongst friends and colleagues. This knowledge will also serve as a foundation for becoming a successful investor! So spend 5 minutes on reading-up this piece and feel empowered!

Net Asset Value

When you invest in a mutual fund you get allotted units based on the prevalent price of the scheme on that day. This price is called NAV or Net Asset Value. All open ended schemes (schemes that are open all the year around and thus one can buy or sell on a daily basis) declare NAV on a daily basis. Thus if you invested Rs. 12,000 in a scheme where the NAV is 12 you will get 12000/12=1000 units. It's the same when you want to sell (or redeem your units). You just multiply the NAV by the units to get the redemption (sale) value.

Open Ended Funds

Many funds are open ended. That is you can buy or sell units on any business day at the prevalent NAV. An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. There is no compulsory lock-in (other than ELSS etc.) mandated in these funds however they can have exit loads which are nothing but penalties introduced to ensure that investors adhere to the ideal holding pattern of the scheme.

Investment Objective

Investment objectives give you a flavor of the kind of instruments that the scheme would invest in. For example there could be funds that invest in equity, debt or both. The investment objective also indicates a broadly worded investment time frame. This term therefore is critical as it decides the fate of your investment. As a thumb rule over the longer term one needs to shield against inflation and in the short term against volatility. Consequently in the risk pecking order, liquid funds are the least volatile as they continuously invest in instruments that are extremely short term nature (that mature in a day/ few days) and at the extreme other hand we have equity funds where the returns are not even remotely predictable over the short term and can be really volatile. Within debt funds too, funds having a lower average maturity are ideal for short-term holdings as they are well protected from the fluctuating interest rate movements. However, holding them for more than their average maturity may not get you the optimal results. There can be various types of debt funds based on the average maturity of the instruments invested in. Although debt funds are less risky than equity funds, they are still subject to market volatility. The level of volatility therefore depends on the average maturity of the specific portfolio. The higher the average maturity, the greater the uncertainty in the short term, which is what results in greater volatility. Conversely, the lower the average maturity, the greater the certainty, which in turn lowers volatility.

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