Tag: Mutual Funds

  • Differences Between ETF vs Mutual Fund vs Index Fund

    Differences Between ETF vs Mutual Fund vs Index Fund

    Explore the differences between etf vs mutual fund vs index fund to make informed investment decisions. This blog post breaks down each investment vehicle’s core characteristics, comparisons, and benefits to help you align your financial goals with the right strategy. Whether you’re seeking liquidity through ETFs, professional management with Mutual Funds, or cost efficiency with Index Funds, understanding these options is crucial for building a diversified portfolio.

    Understanding Meaning of ETF vs Mutual Fund vs Index Fund

    What Are the Main Differences Between ETFs, Mutual Funds, vs Index Funds? Understanding the complexities of investment vehicles is foundational for making informed financial decisions. Exchange-Traded Funds (ETFs), Mutual Funds, and Index Funds are three popular investment options with distinct characteristics and purposes. Although they share similarities in pooling investor funds to diversify holdings, each has unique features that cater to different investment strategies and risk appetites.

    Exchange-Traded Funds (ETFs) investment funds traded on stock exchanges, similar to stocks. They hold assets such as stocks, commodities, or bonds and typically operate with an arbitrage mechanism designed to keep trading close to its net asset value. One of the core characteristics of ETFs is their liquidity; they can bought and sold throughout the trading day at market prices. ETFs offer the flexibility of trading, lower expense ratios, and tax efficiency. They are ideal for investors seeking exposure to a diversified portfolio with the ability to trade like an individual stock.

    Mutual Funds, by contrast, pool money from multiple investors to purchase a diversified portfolio of securities managed by professional fund managers. Investors buy shares directly from the fund at the end-of-day net asset value (NAV), rather than through the stock exchange. Mutual Funds offer a range of investment objectives, from growth and income to sector-specific funds. Key attributes include professional management, diversification, and accessibility with a minimum investment requirement. However, Mutual Funds often come with higher expense ratios and potential sales charges or fees, reflecting the cost of active management.

    Index Funds are a type of Mutual Fund or ETF designed to replicate the performance of a specified index, such as the S&P 500. The primary goal of Index Funds is to match, rather than outperform, the index they track. This passive management approach generally results in lower operating expenses compared to actively managed funds. Index Funds are appealing for their simplicity, broad market exposure, and cost efficiency. They are suitable for investors interested in a low-cost, long-term investment strategy aligned with the market’s overall performance.

    Understanding these core characteristics helps investors choose the right mix of ETFs, Mutual Funds, and Index Funds based on their individual financial goals, risk tolerance, and investment time horizon.

    Definitions of ETFs, Mutual Funds, and Index Funds

    Exchange-Traded Funds (ETFs) investment funds traded on stock exchanges, similar to individual stocks. ETFs hold a diversified portfolio of assets, including stocks, bonds, or commodities, offering investors an opportunity to gain broad exposure to the underlying market. One of the chief attributes of ETFs is their trading flexibility: they can bought and sold throughout the trading day at market prices, which can fluctuate. This ability to trade at real-time prices makes ETFs a favored choice for investors seeking liquidity and transparency. Additionally, ETFs generally have lower expense ratios compared to Mutual Funds due to their passive management style.

    Mutual Funds represent professionally managed investment pools that aggregate money from multiple investors to purchase a diversified portfolio of securities. Investors buy shares from the mutual fund itself rather than from other investors. These funds typically actively managed by professional portfolio managers. Who make decisions to buy and sell securities to achieve the fund’s objectives. Mutual Funds purchased at the Net Asset Value (NAV) calculated at the end of each trading day. This professional management offers a hands-on approach to investment. But typically comes with higher expense ratios due to the active involvement of fund managers.

    Index Funds are a specific type of Mutual Fund or ETF designed to replicate the performance of a specific market index, such as the S&P 500. These funds aim to achieve returns similar to the index they track by holding a portfolio of securities that mirrors the composition of the index. Because they passively managed, Index Funds often have lower expense ratios compared to actively managed Mutual Funds. Their simplicity and cost-efficiency make them particularly appealing to investors looking for a straightforward, low-cost way to invest in the stock market.

    Understanding these definitions and the core attributes of ETFs, Mutual Funds, and Index Funds is crucial for investors to make informed decisions that align with their financial goals and preferences. Each type of fund offers unique advantages and considerations. Shaping their usability and the investor’s approach to building a diversified portfolio.

    Comparison Table Differences Between ETF vs Mutual Fund vs Index Fund

    Exchange-Traded Funds (ETFs), Mutual Funds, and Index Funds. Each offer distinct benefits and potential drawbacks, making them suitable for different types of investors. Below is a detailed comparison that highlights the key differences among these three investment vehicles regarding trading flexibility, management style, costs, tax implications, and investment strategy. This comprehensive table serves as an invaluable quick reference guide. Enabling investors to make well-informed investment decisions based on their specific needs and goals.

    BasicETFsMutual FundsIndex Funds
    Trading FlexibilityTraded on stock exchanges; can be bought or sold throughout the trading day at market prices.Not traded on exchanges; bought or sold only at the close of the trading day at the fund’s net asset value (NAV).Similar to mutual funds; purchased or redeemed based on the NAV at the end of the trading day.
    Management StyleCan be either actively managed or passively managed, but most are passively managed and track a specific index.Can be actively managed by a fund manager who aims to outperform the market or passively managed to track an index.Passively managed, designed to mirror the performance of a particular index.
    CostGenerally, lower expense ratios and lower management fees compared to mutual funds.Higher expense ratios due to management fees, administration fees, and other operating costs.Typically have lower expense ratios compared to actively managed mutual funds, but can be comparable to ETFs in cost.
    Tax ImplicationsMore tax-efficient due to the in-kind creation and redemption process; can minimize capital gains distributions.Less tax-efficient; capital gains are distributed to investors which can impact their tax obligations.Generally more tax-efficient than actively managed mutual funds, but not as tax-efficient as ETFs.
    Investment StrategyOften used for long-term growth, sector exposure, or diversification within a portfolio; flexible to use in various strategies such as hedging.Commonly used for long-term investment goals like retirement; can target specific sectors, industries, or broad market exposure.Ideal for broad market exposure, portfolio diversification, and alignment with a passive investment strategy focusing on long-term growth.

    This comparison elucidates that ETFs, Mutual Funds, and Index Funds cater to different investor preferences and investment strategies. Each has unique attributes that can help achieve specific financial goals. Enabling investors to select the most suitable option based on their individual needs and preferences.

    Key Differences Between ETFs, Mutual Funds, and Index Funds

    When comparing Exchange-Traded Funds (ETFs), Mutual Funds, and Index Funds. Number of defining characteristics arise that are essential for investors to understand. Firstly, liquidity is a notable differentiator. ETFs traded on stock exchanges, allowing investors to buy and sell shares throughout the trading day at market prices. This provides greater flexibility and immediate market access. In contrast, Mutual Funds typically bought or sold at the end of the day when the net asset value (NAV) calculated. Index Funds may mirror this structure, depending on whether they structured as a Mutual Fund or an ETF.

    Expense ratios also vary among these investment vehicles. ETFs often have lower expense ratios due to their passive management approach, making them cost-effective for long-term investors. Mutual Funds, particularly those actively managed, tend to have higher expense ratios due to management fees and operational costs. Index Funds, generally aiming to replicate the performance of a specific market index, often fall in between. As they benefit from lower management costs like ETFs but could incur higher operational costs similar to Mutual Funds.

    Active versus passive management is another key aspect to consider. ETFs and Index Funds typically passively managed, tracking an index or a basket of securities. Which offers predictable exposure to certain market segments. Conversely, Mutual Funds can either actively managed, aiming to outperform the market through active trading, or passively managed.

    Tax efficiency is another critical factor. ETFs tend to be more tax-efficient due to their unique structure allowing for in-kind transfers. Which can minimize capital gains distributions. Mutual Funds, however, may often trigger capital gains taxes for shareholders through more frequent buy/sell activities within the fund.

    Compliance with market regulations is uniformly stringent across all types of funds, but the implementation differs based on structure. ETFs must comply with stock exchange regulations and disclosure requirements. While Mutual Funds are subject to mutual fund-specific regulations that might impose restrictions on liquidity and investment strategies.

    In real-world terms, these differences have practical implications. For investors seeking low-cost, flexible trading opportunities, ETFs might be the most suitable option. Those valuing professional management and a history of performance might lean towards Mutual Funds. Index Fund investors typically aim for broad market exposure with lower costs. The choice among these options should ultimately align with the investor’s goals, investment strategy, and tax considerations.

    Examples of ETFs, Mutual Funds, and Index Funds

    When evaluating the landscape of investment products. It is essential to delve into some notable examples of ETFs, mutual funds, and index funds to provide clarity and context. Exchange-Traded Funds (ETFs) widely regarded for their versatility and liquidity. Notable ETFs in the market include the SPDR S&P 500 ETF (SPY), which aims to mirror the performance of the S&P 500 index. The Vanguard Total Stock Market ETF (VTI), which seeks to track the performance of the CRSP US Total Market Index. Both of these ETFs offer investors broad exposure to the stock market with the ease of trading like individual stocks.

    Mutual funds, on the other hand, managed portfolios that pool together the investments of many individuals to buy a diversified collection of stocks, bonds, or other securities. For example, the Fidelity Contra fund (FCNTX) is a well-regarded mutual fund managed by Fidelity Investments. It focuses on growth stocks, seeking capital appreciation over the long term. Another solid choice in this category is the Vanguard Wellington Fund (VWELX). Which adopts a balanced approach by investing in a mix of stocks and bonds, aiming for moderate growth and income.

    Index funds, designed to replicate the performance of a specific index, offer a more passive investment strategy. The Vanguard 500 Index Fund (VFIAX), for example, is designed to track the performance of the S&P 500 index, providing investors with a stake in some of the largest companies in the U.S. Similarly, the Fidelity Nasdaq Composite Index Fund (FNCMX) seeks to track the Nasdaq Composite Index. Enabling investors to gain exposure to a wide array of technology and growth stocks.

    Understanding these concrete examples of ETFs, mutual funds, and index funds can greatly assist investors in making informed decisions that align with their financial goals and risk tolerance. Each type of fund offers unique features and benefits, thus catering to a variety of investment strategies and preferences.

  • Differences Between ETF vs Mutual Fund

    Differences Between ETF vs Mutual Fund

    Learn the key differences between ETF vs Mutual Fund, two popular investment vehicles that offer diversification, professional management, and cost-efficient options to investors. Understanding their distinct features, from trading mechanisms to management styles and cost structures, is crucial for effective portfolio management and strategy formulation. Discover how these investment options can fit into your financial goals and risk appetite.

    Meaning of ETF vs Mutual Fund

    What Are the Main Differences Between ETF vs Mutual Fund? Exchange-Traded Funds (ETFs) and Mutual Funds both serve as pooled investment vehicles, offering investors a way to diversify their portfolios without needing to directly purchase numerous individual securities. However, understanding their differences is crucial for effective portfolio management and strategy formulation.

    ETFs designed to track the performance of a specific index, commodity, or basket of assets. They trade on stock exchanges similar to individual stocks, which allows for intraday buying and selling. The primary purpose of ETFs is to offer an accessible and cost-efficient vehicle for investors to gain exposure to a wide range of underlying assets. ETFs cater to various investment strategies, from passive indexing to more active sector allocation, while providing a level of liquidity that mutual funds typically do not.

    Mutual Funds, on the other hand, managed by professional fund managers who allocate fund assets to achieve the investment objectives outlined in the fund’s prospectus. Unlike ETFs, mutual funds can be actively or passively managed and typically execute trades at the end of the trading day based on the net asset value (NAV). These funds are a particularly attractive option for individual investors looking for expert management and broad diversification through a single investment.

    The primary reason these investment vehicles exist is to offer investors the benefits of diversification, professional management, and potential cost savings. Both ETFs and Mutual Funds hold a diversified portfolio of stocks, bonds, or other commodities, which helps mitigate risk by spreading exposure across various instruments.

    In an investor’s portfolio, ETFs often play a role in providing liquidity and flexible allocation shifts, suitable for tactical adjustments and intraday trading. Mutual Funds typically utilized for long-term strategies, relying on the expertise of fund managers to navigate market fluctuations and strive for optimal returns over time.

    Thus, ETFs and Mutual Funds together facilitate a spectrum of investment strategies—from ultra-short-term trading to long-term wealth accumulation, enabling investors to select the most appropriate vehicle based on their financial goals and risk appetite.

    Definition of ETF vs Mutual Fund

    Exchange-Traded Funds (ETFs) are investment funds that traded on stock exchanges, much like individual stocks. ETFs designed to track the performance of specific indices, sectors, commodities, or other assets. They offer investors the ability to buy and sell shares at market-determined prices throughout the trading day. One key characteristic of ETFs is their diversification; they can hold a variety of securities, thus spreading risk across multiple assets. Types of ETFs include index funds, sector ETFs, and global ETFs, among others. These funds typically have lower expense ratios compared to actively managed mutual funds due to their passive management style.

    Mutual Funds, on the other hand, are investment vehicles managed by professional portfolio managers. These managers allocate pooled funds from many investors into diversified portfolios, which may include stocks, bonds, or other securities. Investors purchase shares of the mutual fund, which represents a portion of the holdings in the diversified portfolio. Mutual funds usually bought or sold at the end of the trading day at the fund’s net asset value (NAV). They come in various types, such as equity funds, bond funds, balanced funds, and actively managed funds. Actively managed mutual funds aim to outperform the market by making strategic buy and sell decisions. This active management often results in higher expense ratios compared to ETFs.

    The main differences between ETFs and mutual funds lie in their trading mechanisms, management styles, and fee structures. ETFs provide liquidity and flexibility, allowing investors to trade throughout the day, while mutual funds offer professional management and a wider range of investment strategies. Both are popular choices for investors looking to diversify their portfolios, but their different characteristics cater to varying investment goals and preferences.

    Comparison Table of the Differences Between ETF and Mutual Fund

    FeatureETFsMutual Funds
    Trading FlexibilityCan be bought and sold throughout the trading day at market price.Transactions are executed at the end of the trading day, based on the Net Asset Value (NAV).
    Management StyleTypically passively managed, tracking a specific index.Can be either actively managed, with a fund manager making investment decisions, or passively managed, similar to ETFs.
    Cost StructureGenerally lower expense ratios, with additional costs associated with buying and selling through a brokerage.Higher expense ratios, often including management fees and potentially sales loads or redemption fees.
    Minimum Investment RequirementsNo minimum investment; one can purchase as few or as many shares as desired, subject to the share price.Often have minimum investment thresholds, which can range from $500 to several thousand dollars.
    Tax ImplicationsGenerally more tax-efficient due to their structure, with lower capital gains distributions.May incur higher capital gains taxes due to the fund’s internal trading activities, especially in actively managed funds.

    This comprehensive comparison table highlights the distinct features of ETFs and Mutual Funds. Allowing investors to make more informed decisions based on their individual financial goals and preferences.

    Key Differences Between ETFs and Mutual Funds

    Exchange-Traded Funds (ETFs) and Mutual Funds are both popular investment vehicles. Yet they exhibit several fundamental differences that can influence an investor’s choice. One of the primary differentiators is liquidity. ETFs traded on stock exchanges, allowing investors to buy and sell shares throughout the trading day at market price. This intraday liquidity provides flexibility and enables investors to react swiftly to market developments. In contrast, Mutual Funds transacted at the Net Asset Value (NAV), which calculated at the end of each trading day. This means buying or selling Mutual Funds subjected to not only the end-of-day pricing but also potential delays until the order processed.

    Expense ratios also differ significantly between ETFs and Mutual Funds. Generally, ETFs tend to have lower expense ratios due to their passive management style. Many ETFs track an underlying index, thus requiring fewer resources to manage. Conversely, Mutual Funds, especially actively managed ones, often incur higher fees because they rely on professional managers to make investment decisions. Which involves research, analysis, and frequent trading. Therefore, investors looking for cost-efficiency might gravitate towards ETFs. While those willing to pay a premium for potentially higher returns may opt for Mutual Funds.

    When considering management styles, ETFs are predominantly passively managed. Which can translate to a more stable performance that mirrors the index they track. On the other hand, actively managed Mutual Funds offer the potential to outperform the market through expert investment decisions. However, this active management also introduces the risk of underperformance compared to the benchmark and higher operating costs.

    Investment goals play a pivotal role in choosing between these funds. Long-term investors may prefer Mutual Funds. Particularly if they seek active management and are willing to tolerate higher fees for the chance of superior returns. On the contrary, those who desire broad market exposure with lower costs and preferable tax treatment might find ETFs more appealing.

    Tax efficiency is another critical aspect where ETFs often have an edge. Due to their unique structure and the in-kind creation and redemption process. ETFs can minimize capital gains distributions, leading to more favorable tax implications for investors. Mutual Funds, however, can generate taxable events through portfolio turnover and distribution of capital gains.

    To illustrate, an investor with a long-term horizon, looking for active management to potentially beat the market, might choose a Mutual Fund despite the higher fees. In contrast, an investor focused on short-term trading opportunities or cost-effective broad market exposure would likely benefit more from investing in an ETF. Each vehicle has its own set of advantages and disadvantages. Making the choice highly dependent on individual investment goals and preferences.

    Examples of ETFs vs Mutual Funds

    To understand the distinctions between ETFs and mutual funds, it is useful to look at specific examples of each. Starting with ETFs, one prominent example is the SPDR S&P 500 ETF (SPY). The SPY is designed to mirror the performance of the S&P 500 Index, providing low-cost exposure to 500 of the largest companies in the United States. Investors might choose SPY for its liquidity, low expense ratio, and ease of trading, as it can be bought and sold like a stock on the stock exchange. Another highly regarded ETF is the Vanguard Total Stock Market ETF (VTI). This ETF aims to track the entire U.S. stock market, including small-, mid-, and large-cap growth and value stocks. Leveraging VTI’s broad approach allows investors to diversify their portfolio with one single investment vehicle.

    On the mutual funds side, the Vanguard 500 Index Fund Admiral Shares (VFIAX) is a notable example. Similar to the SPY, VFIAX seeks to replicate the performance of the S&P 500 Index. Investors who favor traditional mutual funds may prefer VFIAX due to its professional management and the ability to engage in minimal initial investments through dollar-cost averaging. The Fidelity 500 Index Fund (FXAIX) is another widely recognized mutual fund. FXAIX provides broad exposure to the S&P 500 and features a competitive expense ratio. Investors often choose these funds for their historical track records, the benefit of active rebalancing, and reinvestment of dividends.

    The investment focus between these ETF vs mutual fund is quite similar. Predominantly aiming to provide diversified exposure to the U.S. stock market. Investors might opt for ETS like SPY or VTI for better liquidity and lower fees. While mutual funds like VFIAX and FXAIX might attract those interested in professional management and systematic investment approaches. Performance metrics for these options often reflect the general trends of the broader stock market. With occasional variations due to fee structures and management strategies.

  • Explain How to Investment in Mutual Funds?

    Learn and Study, Explain How to Investment in Mutual Funds?

    Mutual fund companies, also known as Asset Management Companies (AMCs) collect funds from the public (mainly from small investors) and invest such funds in the market and distribute returns/surpluses in the form of dividends. Surpluses can also be reflected in higher Net Asset Value (NAV) of the scheme. In simple words, a mutual fund company collects savings of small investors (pool their money); the fund managers of the concern invest such pool of funds to market (securities); when returns are generated from such investment, passed back to the investors. Also learned, Process of Investment, Explain How to Investment in Mutual Funds?

    This is how a mutual fund works. First, an offer document (containing details of the scheme, its investment horizon, and class (ES) of securities it intends to invest etc.) is issued to the public. Then the collected money is pooled together to constitute a fund. This fund is managed by fund managers of AMC who take major investment decisions. A trust takes care that the mutual fund investments are in accordance with the scheme of the fund and is being managed in the interest of the investors. The returns from such investment activities are distributed in accordance with the scheme of the fund.

    NAV of a mutual fund (or in other words NAV per unit) refers to the total asset managed by the fund at its market value divided by the number of outstanding (issued and sold) units of the fund. For instance, a fund having net asset worth of Rs.100 crores and Rs.10 crore units are outstanding then the NAV per unit of the fund would be Rs.10. The NAV of a scheme depends on the market value of its investments and hence it fluctuates with the fluctuating share prices of its investment. An increase in NAV means capital appreciation for investors.

    Since mutual funds are managed by professionals who have requisite experiences and qualifications in the areas of the stock market, as far as a new entrant in the stock markets is concerned, these funds act as a safe vehicle for investment. Moreover, as mutual funds invest in a number of scrips, the impact of risks associated with individual securities is minimized. To put in financial language, the aim is to diversify the unsystematic risk in the portfolio. Also, since the pooled funds are invested in different sectors and stocks, there is a diversification effect reducing the overall risk of the portfolio.

    Since mutual funds generally trade in a large number of securities at the same time, there is the advantage of economies of scale. In other words, there are savings in transaction costs.

    According to the investment objective, mutual funds can be classified as (a) growth funds, (b) income funds and (c) balanced funds. Growth funds invest the majority of their pooled amount with the objective of achieving long-term capital appreciation. Income funds provide periodic returns to investors in the form of dividends. Balanced funds are a midway between growth funds and income funds. They balance their investment in such a way that investors not only get the periodical return, but their capital also tends to appreciate which is reflected in the higher NAV.

    If you are an investor who seeks for a suitable fund, then it depends on your risk-bearing capacity (your risk profile). If you are a high risk-averse investor who requires the periodic return, then you should always prefer investment in income funds. If you have a high risk taking capability and you have surplus funds to invest, then go for growth funds. If you want a small periodic return along with capital appreciation, then go for balanced funds.

    Investment in mutual funds should never be looked upon from the point of view of return. It is the risk-return paradigm which can help us to optimize our return over a period of time. Another point you should remember is that you should never attempt to compare two schemes of the mutual fund with different investment objectives on the basis of the returns provided by them, if you do so, it would be like comparing apples with mangoes.

    Sharpe ratio and Treynor Ratio are the tools to measure the performance of mutual funds over a period of time. Sharpe Ratio is obtained by dividing the difference between the return of the portfolio and risk-free rate of interest to the standard deviation of the portfolio return. This ratio takes into account surplus return earned by the fund over risk-free rate of interest and then divides it by standard deviation of the portfolio return (which is basically a representative of risk which measures the deviation of actual return of the portfolio with respect to mean return).

    Higher the return better is the fund. Treynor Ratio also takes into account surplus return earned over risk-free return but the measure of risk here is beta (a measure of systematic risk) rather than standard deviation. Thus, Treynor ratio is obtained by dividing the difference between the return of the portfolio and risk-free rate of interest to the beta (market risk/systematic risk) of the portfolio.

    There are some absolute performance measures such as Jenson’s Alpha, Fama’s Measure and Expense Ratio which provide an indication about the performance of a mutual fund as a whole. Jenson’s Alpha Measure helps us in identifying whether the fund has been able to outsmart its expected return.

    The expected return of a security is equal to:

    Re = Rf + β(Rm – Rf)

    Where Rf is the risk-free return, β is the systematic risk and Rm is the return on market index (return earned by the fund).

    Fama’s measure is obtained by the following formula:

    Fama’s Measure = Rp – [Rf + (σp/σm)(Rm – Rf)]

    Where, Rp = actual return of portfolio; Rf = risk free return, Rm = return on market index, σp = standard deviation of portfolio return, σm = standard deviation of market index return.

    Thus, instead of β, which takes into account only systematic risk, this measure takes into account standard deviation of stock return as well as standard deviation of market returns.

    Expense ratio refers to the total amount of expenses of the fund as a percentage of total assets of the fund. The expenses include all the charges in the form of administrative overheads, salary of staff etc. However, expenses do not include brokerage.

    The return on mutual funds is never equal to the return on securities which the investor can earn if he invests directly in those securities since there are front-end load, back-end load and annual expenses which will be deducted from the fund. Front-end fee is charged by the AMC at the time of initial investment in the fund. Exit load is the number of fees charged at the time of redemption (surrender) of the unit. Generally, funds which charge front-end fees do not charge back-end fees/exit load. Moreover, there are expenses which are deducted annually for meeting administrative and other expenses of the fund.

    Mutual fund schemes can be in the form of open-ended schemes or closed-ended schemes. In closed-ended schemes, a fixed number of units are issued by the fund and thereafter this number remains constant till the maturity of the scheme. The option available to the investors, in this case, is that they can buy and sell the units in the secondary market. The open-ended schemes are without any fixed number of outstanding units. Any investor can invest money in accordance with the NAV of the scheme any time. Similarly, investors get an opportunity to redeem their units any time. The logic here is that since there is no fixed total number of units, mutual fund not only accepts money for investment purpose later on after the scheme is launched but also redeems units of holders as and when required by them.

    Finally, there are index funds, ETFs and Fund of Funds, which should also be analyzed. Index funds are those funds which create a portfolio which replicates the composition of a particular index. For instance, an index fund on NIFTY will invest in all those securities which are a part of that index and the proportion is also similar to the weights which the individual securities have in that index. Thus these funds tend to replicate the performance of that index. If we put it in financial language, these funds create a portfolio with a β of 1 which exactly matches the performance of the market.

    For Example:

    When the market i.e. SENSEX moves up by 15% over a time period, the portfolio value also rises by 15% (or rather is expected to rise). This is because the securities which have been purchased by this fund are a part of that index and have been purchased in the same proportion as is the weight of those securities in the index. If an investor intends to have a complete elimination of unsystematic risk, i.e. he wants to earn a return which the index earns irrespective of the performance of individual stocks in the market he should invest in such funds.

    Exchange traded funds or popularly known as ETFs are mutual funds whose units are traded in stock exchanges. Unlike the traditional funds in which units are directly redeemed by the mutual fund itself, the units of these funds are bought and sold in the market just like shares. These funds may be open-ended or closed-ended. The investors of ETFs do need to have a Demat account.

    There are ETFs which are traded on stock exchanges with the underlying asset as gold, known as ‘Gold Exchanged traded Fund’. They provide a convenient and easy vehicle for retail investors to participate in the gold bullion market. Thus the fund issues a certificate for the specified amount of gold to its unitholders. The scheme is listed on a stock exchange and hence investors can buy and sell the units on the stock exchange. The advantage here is that there is no risk of holding physical gold stock and the investor can still have a notional claim over units of gold.

    There are also mutual funds which invest in other mutual funds and these mutual funds are known as the fund of funds. Thus, instead of directly investing in securities of corporates or bonds, these mutual funds invest I other mutual funds in order to get maximum diversification.

  • Explain How to Calculate NAV in Mutual Funds?

    Explain How to Calculate NAV in Mutual Funds?

    Learn, Explain How to Calculate NAV in Mutual Funds?

    The Net Asset Value (NAV) is the market value of the assets of the scheme deducting its liabilities. Simply put, the NAV is what investors are required to pay to buy or sell one share of the mutual fund. Keep in mind any additional fees are not included in this amount. In accounting terms, NAV is also known as the book value of the mutual fund. Also Learned, Mutual Funds, Explain How to Calculate NAV in Mutual Funds?

     

    The net asset value per mutual fund unit on any business day is computed as follows:

    NAV = (Market value of the fund’s investments + Receivables + Accrued income -Liabilities – Accrued expenses)/Number of units outstanding.

    Rules Governing the Mutual Fund NAV Calculation:

    1. Accrued Income and Expenses: The correct accrual of all incomes and expenses is a requirement for computing NAV. In practical terms, these are just estimates. For example, the investment manager’s fees have to be accrued every day for computing NAV but the fee is based on the weekly average of net assets. Changes in NAV due to the assumptions about accruals should not impact NAV by more than 1 %.
    2. Sale and Purchase of Securities and Units: The purchase and sale of securities have to be recorded in the books of the fund, and this impacts the net assets of the fund. Sale and repurchase of units alter the number of unitholders outstanding in the fund and impacts the denominator of the NAV equation.
    3. Initial Expenses: When a mutual fund scheme is launched, certain expenses are incurred. These relate to printing and mailing, advertisements, commission to agents, brokerage, stamp duty, marketing, and administration known as initial or pre-operational expenses, they are linked to the corpus of the scheme. The fund has to give a break up of these expenses in the prospectus.
    4. Recurring Expenses: Apart from the initial expenses, mutual funds incur recurring expenses every year. These expenses include items like the asset management fees, registrar’s fees, and custodial fees and are charged to the profit and loss account of the scheme.
    5. Sales and Repurchase Load: Sales or front-end load is a charge collected by a scheme when it undertakes fresh issue of units or shares. Suppose a mutual fund issues Rs.1,00,000 worth units having a face value of Rs.10 each. The company incurs some initial issue expenses, which may be around 1% of the face value, or in other words, the company may levy an entry load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’ load is a charge collected by a scheme when it buys back the units from the unit holders. It is because of the front-end and back-end loads the mutual fund schemes are at a premium and repurchased at a discount to NAV. The repurchase price is usually less than the reissue price.

    Learn how to calculate Net Asset Value with the following examples:

    • Example 1: If the net assets of a fund are $10 million, and the fund holds 2 million shares. Then, the NAV per share = $5 ($10 million / 2 million).
    • Example 2: YTC Corporation has total assets of $3,500,000 (including intangible asset $500,000) and total liabilities of $1,000,000. The calculation for net asset value of ABC corporation is as follows: NAV = total assets – intangible assets – total liabilities = 3,500,000 – $500,000 – $1,000,000 = $2,000,000
    • Example 3: A mutual fund has total assets of $2,800,000, liabilities of $800,000, and 200,000 outstanding shares. Then, the NAV per share = (2,800,000 – 800,000) / 200,000 = $10.
    NAV in Brief:

    The Net Asset Value (NAV) of a mutual fund is the price at which units of a mutual fund are bought or sold. It is the market value of the fund after deducting its liabilities. The value of all units of a mutual fund portfolio is calculated on a daily basis, from this all expenses are then subtracted. The result is then divided by the total number of units the resultant value is the NAV. NAV is also sometimes referred to as Net Book Value or book Value. Let’s discuss its calculation in a bit more detail.

    NAV indicates the market value of the units in a fund. So, it helps an investor keep track of the performance of the mutual fund. An investor can calculate the actual increase in the value of their investment by determining the percentage increase in the mutual fund NAV. NAV, therefore, gives accurate information about the performance of the mutual fund.

    Calculation of NAV:

    Mutual fund assets usually fall into 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.

    Explain How to Calculate NAV in Mutual Funds - ilearnlot

    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.

    Some points to note:

    The mutual fund itself and/or certain accounting firms calculate the NAV of a mutual fund.

    Since mutual funds depend on stock markets, they are usually declared after the closing hours of the exchange.

    All Mutual Funds are required to publish their NAV at every business day as per SEBI guidelines.

    Also, NAV is obtained by subtracting the expense ratio of a fund. This expense ratio is the total of all expenses made by the mutual fund annually, including the operating expenses and the management fees, distribution and marketing fees, transfer agent fees, custodian fees and audit fees.

  • What are a Mutual Funds?

    What are a Mutual Funds?

    Learn and Study, What are a Mutual Funds?

    A Mutual Fund is a special type of investment institution which collects or pools the savings of the community and invests large funds in the variety of Blue-chip Companies which are selected from a wide range of industries with the objects of maximizing returns/incomes on investments. Mutual Funds are basically a trust which mobilizes savings from the people and invests them in a mix of corporate and government securities. Money collected by the investors is invested in various issues of primary and secondary markets in order to gain profits on such investments. Also learned, the Process of Investment, What are a Mutual Funds?

    What are a Mutual Funds - ilearnlot

    A Mutual Fund is a Trust, which combines the investments of various investors having similar financial goals. The Trust issues units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, which provide returns in the form of dividends, interests, and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds. Ordinary investors, who want to invest their savings, neither understand the complexities of financial markets nor have the time to watch, research and analyze different equities, securities or any other investments opportunities that are available in the market.

    At present, all the markets viz. the debt market, the equity market, the money market, real estates, derivatives, and the market dealing with the other assets have now reached a stage where a minimal information affect the markets. Besides this, the economy has opened up and global events influence their performance.

    It is very difficult for a layperson to keep track of various investments, transactions, brokerages etc. In the present scenario, mutual funds are some of the most efficient financial instruments as it offers services like managing investments at a very low cost.

    What is NAV or Net Asset Value?

    NAV of the Fund is the market value of all the assets of the Fund subtracting the Liabilities. NAV reflects the Fund that will be available to the shareholders if the Fund is liquidated and all the liabilities are paid. In the mutual fund industry NAV refers to Net Asset Value per unitholder, which NAV of the Fund divided by the outstanding number of the units.

    It shows the performance of the Fund.

    • Calculation of NAV = Net Asset Value of the fund sum of market value of shares/debentures + Liquid assets/cash Dividends/interest accrued – All liabilities
    • Net asset value per unit =NAV of the fund / Outstanding number of units

    The market value of the shares and debentures is calculated by multiplying the number of shares/units by the closing price of the shares/debentures. The closing price will be of the previous day of the stock exchange from where the shares have been purchased.

    If the shares were not traded on the previous day in that stock exchange, then the closing price of the shares of any other stock exchange is taken where the shares were traded. If the shares were not traded on any stock exchange the previous day, then the closing price of the shares when they were last traded is taken.

    For untraded shares, the value has to be determined by the other methods such as Book Value, comparable company approach, etc. Value of the illiquid bond is estimated on the basis of yields of comparable liquid bonds.

    To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

    It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.