Theme: Organizational aspects and procedure of mutual funds

Increase in Net Asset Value (NAV)

After a month, the portfolio does not witness any changes concerning holding and the number of investors. Eventually, as the price of the stocks starts to move, the portfolio value keeps changing. As the prices move up, the total value of the portfolio increases.

Investors buy or sell their investments. A total of 1,00,000 units were purchased for this fund. In terms of value, the total outgo is INR 12.5 lakh (INR 12.5 * 1,00,000 units). As a result, the fund's assets under management (AUM) fell to INR 1.125 trillion. And the total number of units comes down to 9 lakh units. Hence NAV remains at INR 12.5 per unit.

First, the fund manager uses the cash balance in the portfolio to pay investors to engage in acquisitions. In addition, he can also sell some shares if necessary. However, the sale of shares will be for companies that do not have high upside potential. These decisions are supported by relevant studies.

Landing at NAV

Let's say the stock price is going down. As a result, the value of the portfolio decreases. Here it falls from INR 1.25 crore to INR 1.10 crore. Hence the NAV is now INR 12.22 per unit (INR 1.10 crore/9 lakh units).

Now another investor invests in the fund. The value of his investment is INR 1 million. However, this time for the same amount of investment, he will get only 8,183,306 units. As a result of these new investments, the value of the portfolio is 1.11 mln. Thus, the total number of units has now increased to 8,183,306 units.

It's important to remember that the above scenario is just a small example of how mutual funds work. In fact, every day there are investments/purchases and withdrawals. Thus, the NAV of the fund fluctuates daily. However, the basis of the calculation revolves around the same concept.

Structure of Mutual Funds in India

The composition of mutual funds in India has three important entities. These three entities are involved in setting up and managing the mutual fund as per SEBI (Securities and Exchange Board of India) regulations.