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What is a Mutual Fund?
A mutual fund is a pool of money put together by a group of investors, who stand to benefit or loose from that pool to the extent they have invested.

This pool is created since small individual investments have limited power and ability to influence the outcome of the investment. On the other hand, when the investment is large, the investor can have greater control on the outcome of the investment.

Thus, many small investors gather their individual small investments into a larger investment to take advantage of the opportunities offered by large investments. This is called a mutual fund.

What does the Mutual fund invest in?
Mutual funds can be created for investing in anything. The investments that the mutual fund is going to make are discussed in the mutual fund's offer document.

Typically, mutual funds invest in investment opportunities that have a trading market around it, such as stocks and shares, bonds and debentures, etc.

How does the investors benefit?
The most important factors in choosing who to have a deposit with, is the safety of the deposit, and the rate of interest that is paid on the deposit.

How does a Mutual funds works?
A mutual fund is managed by an Asset Management Company (AMC). Professional investors, who study where and when to make investments staff the AMC. The AMC creates a mutual fund, and invites the public to subscribe in the mutual fund with their investment. The funds collected are then invested by the AMC and are continually managed.

Unlike other investments, the mutual fund itself is not traded nor does it offer guaranteed returns like a deposit. The mutual fund's Net Asset Value (NAV) determines the value of the investment. Investors redeem their investments in the mutual fund on the basis of the NAV from the mutual fund itself.

Equally, when investors want to buy, they buy into the mutual fund on the basis of the NAV.

The investments are managed by professionals who know more about deciding what to buy and sell and when to buy and sell

The risks and rewards of investments are spread across a large number of individuals, so losses are minimized

Access to funds is quick, since there is no need to sell or buy from the market

What is Net Asset value?
The Net Asset Value of a mutual fund is the total market value of the holdings of the mutual fund less its liabilities, such as expenses, management fees, etc. This is calculated on a daily basis.

What this means is, if the mutual fund were to be dissolved or liquidated, by selling off all the assets in the fund, on that specified date, the Net Asset Value is what all the holders of the mutual fund will collectively own and will be given this amount in proportion to their holdings.

You can estimate your share of the holding of the mutual fund by the Net Asset Value per unit. This is the value represented by the ownership of one unit in the fund. It is calculated simply by dividing the Net Asset Value of the fund by the number of units.

Commonly Net Asset Value is always referred by its unit value rather than by the total Net Asset Value of the fund.

How is Net Asset value calculated?
Net Asset Value is calculated as follows:

Net Asset Value = (Market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued) - (Amount due on unpaid assets + Expenses incurred but not paid + Management and other fees)

This is how the above are calculated

Valuation of marketable shares/debentures: The last or closing market price on the principal exchange where the security is traded

Valuation of illiquid and unlisted and/or thinly traded shares/debentures: For shares, this could be the book value per share or an estimated market price based on performance of other shares in the industry. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity

Accrued dividends/interest: Companies announce dividends, however, pay it at a later date. If a dividend is announced, then the announced dividend is taken as the accrued dividend. Similarly, interest is payable on debentures/bonds in a pre determined frequency at a pre determined rate. Therefore for every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date.

Expenses including management fees, custody charges etc. are calculated on a daily basis. The management fees is as per the declaration in the offer document of the mutual fund.

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