Mutual Funds and NAV

Mutual funds are pools of money that are invested by many people in order to make money. The NAV (net asset value) is the value of the mutual fund at any given time. This value is decided by the mutual fund's trustees (usually a group of people who are responsible for the fund's management) and is based on the fund's assets (money that is invested in the fund) and liabilities (money that the fund owes to investors).

Since it has become quite easy to invest in mutual fund schemes, many people only look at the scheme’s performance and NAV before investing in them. They do not know anything about the working of mutual funds and how the NAV is decided, which is a big mistake they make as investors. If you have plans to invest in mutual funds, you must know the basics. Understand it with this example -

You, along with four other friends, want to buy a pack of 10 chocolates worth Rs. 50. But the problem is – that each of you has only Rs. 10, and the shopkeeper does not sell the chocolates loosely but as a complete box. As a solution, you and your four friends decided to pay Rs. 10 each and buy the chocolate box. Based on individual contribution, each one of you receives two chocolates from the pack.

This is analogous to mutual fund schemes in which several investors having a common investment objective pool their money and invest the total amount in bonds, equities, and other money-market instruments. Just like the chocolates in the example shared above, any income or gains from these investments is distributed proportionately among the investors (after deducting expenses and taxes if applicable). The value of each chocolate in the analogy represents the value of one unit of mutual funds, popularly known as Net Asset Value (NAV).

-          economictimes