Basic Elements of Mutual Funds

Mutual Funds are nothing more than Investment Vehicles for those who are unable to invest directly in capital market due to some or the other reasons like lack of knowledge, lack of surplus money etc.

Any income earned requires some capital investment at first followed by some expenses. Same is true about Mutual Funds also. Capital is investor's investment, income is return generated by Fund Manager and expenses is total cost borne by AMCs to manage such funds.

For the simplicity of investors to count on the growth of their investments, NAV was coined i.e. Net Asset Value. In simple terms NAV can be calculated as :
Capital + Income Earned - Expenses Incurred

These are the three basic elements that drive the value of Mutual Fund Units. Now let's discuss in detail.

Capital - It is the amount invested by any investor in the form of SIP or Lumpsum Investment.

Income Earned - Income earned may be of three types for an investment made by fund manager. If the investments are in Equity Shares, income may be in form of Dividend on such equity shares or Capital Gain due to rise in market price of such shares. If investment is made in Debt instruments like Bonds, Debentures, G-Sec, TDRs etc, income may be in the form of Interest income or Capital Gain.

Expenses Incurred - For AMCs there are various expenses that are to be paid before the return is actually passed to an investor. Such expenses include Salary to AMC Employees, Rents for offices, Electricity Bill, Taxes, Distributor's commission, Brokerage on Securities transaction and many more.

So be it any type of fund, these three basic elements are the key drivers for NAV determination.

Article by CA Bhaskar Abhishek