Theme: Organizational aspects and procedure of mutual funds

Fund Returns

The portfolio manager continuously strives to earn returns from the investments they make on behalf of the fund investors. Thus, all their efforts in mutual fund research, monitoring, and rebalancing the portfolio increases the fund's NAV. Once the fund makes returns, they are either distributed or invested back into the fund. While, for dividend funds, the returns are distributed in the form of dividends. For growth funds, the returns are reinvested into the fund to enhance the wealth of the fund investors. It is the critical step of mutual fund investing as this completes the cycle of investing. The returns, if retained in the fund, are further invested in creating more wealth for investors.

Hence, mutual fund investing is a continuous process that channels small savings of many investors in productive securities to maximize their wealth.

How mutual funds work?

For instance, let's assume that Aditya Birla Mutual Fund launches a mutual fund scheme. Let us say, ABSL Top 25 Fund. For ease of understanding, let's assume the scheme collects INR 1 crore from 100 investors. Investment per investor being INR 1 lakh. The fund house allocates the units at a NAV of INR 10. Therefore, each investor gets 10,000 units. Thus, the total number of units issued and allocated by the fund house is 10 lakh units.

ABSL Top 25 Fund's objective is to invest across 25 stocks. To follow the fund's objective, the fund manager does his research and picks the top 25 stocks. The fund manager believes that buying stocks that fit the criteria will contribute significant returns to the portfolio. Upon selecting the shares, the fund manager invests equal amounts across each stock. Thus, the equity fund includes top 25 shares.

As the Assets Under Management (AUM) of the fund is INR 1 crore, investment in each stock is approximately INR 4 lakh. Thus these stocks become part of the equity fund portfolio. Also, in reality, the fund manager deals and invests in high proportions. All the investments are backed by research. The fund manager believes in buying stocks that give good returns. Additionally, the fund also maintains a cash balance. It is to deal with redemption from investors.