Module 11   Personal Finance (Part 1)Chapter 7

Concept of fund & NAV

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7.1 – The Family pot 

I hope the previous chapter helped you understand the structure of a Mutual Fund company. Although not essential, I believe that the understanding of the Mutual fund structure will help you at some point in your investment journey.

Moving ahead, we direct our efforts to learn more about Mutual fund investing. We will learn about the different fund category, fund analysis, fund schemes, and many other things associated with mutual fund investment. Now, before we learn these concepts, we need to understand a fundamental concept. From my observation, I’ve noticed that many people get a bit lost when we use the term ‘fund’ in the context of a mutual fund.

So before we start digging deeper into the mutual fund concepts, we must get complete clarity on what the term ‘fund’ means.

I will take the liberty to simplify many things in this chapter; the simplifications in this chapter are only to help you get the context right.

So let us started, and as usual, let us build an imaginary story to help relate to the topic better.

Now, think of yourself as the stock market whiz-kid in your family. You have made a few successful stock investments, managed to score few multi-bagger, called the market top and bottom couple of times, and have even managed to get a selfie with Rakesh Junjunwala at an event.

The story of your stock market success has sent a ripple in your family circuit, and you are even the centre of attention in the family WhatsApp group.

As expected, soon,  your uncles, aunts, and cousins approach you to help them manage their money. The quasi fund manager status that you have achieved for yourself has gotten you all excited.

The question is – how will you manage this money?

Going strictly by regulations, unless you hold the license for fund management, like the PMS license we discussed in the previous chapter, you cannot manage other people’s money.

Given this, assume that you apply for a fund management license and eventually procure one from SEBI.

Now, you are all set to render your fund management services to your family members and hopefully soon to many others outside the family.

Your family members are happy and are eager to reap the benefits of your fund management skills. The following family members approach you with their money. The details follow –

So you have five individual investors and each one of them has a different amount of money to invest. In total, across these five individuals, you have managed to pool in Rs.275,000/-.

 

Before you get started, you need to set a few expectations –

  • All investors are treated fairly in terms of return generated
  • You are permitted to treat these individuals differ in terms of service provided. For example, the aunt has invested the highest amount, so maybe when she visits, you can give her coffees and cookies, while the nephew has invested the least, so you can decide not to offer the coffee and cookies

The above two are critical points, let us spend a bit more time to rivet it.

Imagine you and I walk into a restaurant. You are a regular at the restaurant have been to the restaurant multiple times and have generated enough business for the restaurant. However, this is my first visit to the restaurant.

We both end up ordering a portion of biryani. The quality and quantity of the biryani we both get served will remain the same. However, since you are regular, the owner himself may decide to serve you with fine silver cutlery, and the owner may even spend a few minutes chatting about your well-being. On the other hand, I’d be served with regular cutlery and treated like a regular customer.

However we both get to eat the same dish, no difference there.

So you as a fund manager can differentiate between customers on how much they have invested, but should certainly not differentiate and generate two different returns for two different customers based on how much they have invested. They all should experience the same returns.

In fact, in the mutual fund world, this gets further streamlined in terms of investment objectives, mandates, and other things. We will get to that in the next chapter.

Anyway, now that the expectations are in place, it now boils down to logistic arrangements on how this money gets managed.

To manage this money, you now ask your family members to transfer all the money into one single account. The idea is to pool all the money in the same account and use that to make investments in the market.

Since it’s all pooled into one account, that account holding the funds belongs to all. Think of this as a rationale as to why ‘Mutual funds’ are called ‘Mutual’ Funds.

7.2 – The fund logistics

As a fund manager, it is your responsibility to ensure that those funds are invested in the stock market, and it grows at a healthy rate. The selection of stocks is your prerogative, and you get to pick the stocks, choose for how long to hold them and decide when to sell them. While you do this, you need to ensure that every investor of yours is given the same treatment in terms of wealth creation.

Remember, you are pooling all individual monies and investing it as a whole aka a fund. So the return experienced by the investors should be uniform.

So given this, how do we ensure we have an equitable distribution of returns across all the clients?

To do this, we can start by issuing shares against the investment made by each investor. We can start by assigning a notional value to each of these shares.

This notional value or the initial value can be anything, and you can assign 5,10,50, or even 100 as the starting value. It does not matter. The most popular notional value is Rs.10, so we will stick to that.

We now issue Rs.10/- notional value shares to all our investors and estimate the number of shares each investor holds. For example, the uncle has invested Rs.65,000/-, so he gets –

= 65,000/10

= 6500 shares.

The table now looks like this –

The total number of shares distributed across the five investors is 27,500, which, when multiplied by the notional value, i.e. 10, gives us the total corpus value, i.e. Rs.275,000/-.

Alright, now that the fund is formed and shares distributed across clients, the fund manager gets to work on things he is best at, i.e. to pick stocks and invest the money.

As a fund manager, you decide to invest the funds, i.e. Rs.275,000/- across ten stocks. For the sake of simplicity, you choose to invest the same amount across all the ten stocks. The distribution of funds in this manner is referred to as the ‘equally distributed portfolio’.

The total corpus is Rs.275,000/-, so each stock gets an investment of Rs.27,500/-.

The division of funds across the ten different stocks look like this –

As you can see, the money invested across ten different stocks, each with different share price, but the same investment goes to every stock, i.e. Rs.27,500/-

At this stage, two things are in place –

  • The shares are issued to all investors. The number of shares is proportional to the individual investment made
  • The funds are invested in the markets across ten different stocks

Now, once the funds are entirely invested in the market, the value of the overall fund depends on how the shares perform daily. A few stocks can go up, and a few can come down, resulting in either a profit or a loss. This profit and loss should be passed to the investors. The quantum of profit or loss experienced by the investors is directly dependent on the amount of money each investor has invested in the fund.

Let’s continue the example to see how the P&L pass through happens. I’ve randomly assigned percentage movement to all these stocks.

As you can see, the stock prices have changed on day 2, thereby the invested value across each share also varies accordingly. As a result of this change, the total value of the portfolio is Rs.277,844. The fund has generated a one day return of Rs.2,844/- or 1.0340%.

The profit of Rs.2,844/- has to be distributed across all the five investors in proportion to their investments. To ensure a fair distribution, all we need to do is, ensure the notional value goes up (or down) by the same percentage as the fund, which is 1.0340% in this case.

Initial notional value (day 1) – 10

P&L % in funds – 1.0340%

New notional value (day 2) – 10 *(1+1.0340%) = 10.1034

So, the new notional value is 10.1034, multiplying this with the number of shares should result in the new investment value for the investor.

As you can see, the investment for each of the investors has gone up by the same percentage point, but the absolute money made by them differs, based on the initial investment amount.

Also, if you add up all the new investment amount, you will get the new fund value, i.e. Rs.277,844/-.

Before we wind up this chapter, I want you to remember these points in the context of a mutual fund –

  • An investment fund is formed when different people pool in their money
  • The investment objective remains the same across all the investors
  • Notional value is assigned at the start of the fund formation, which then fluctuates based on the daily investment value. In the Mutual fund world, this is called the ‘Net Asset Value’.

A mutual fund’s net asset value or NAV is one of the most important metrics. On an end of day basis, the mutual fund company does the following calculations –

  • The value of all the investments
  • Expenses of running the mutual fund

Based on these two parameters, the NAV of a fund is estimated daily. The formula to calculate the NAV is –

NAV = (Value of all the assets – the expenses)/number of shares (units)

I’ll end this chapter here.  I’ll be happy if you have fully understood the concept of what a fund is and the role NAV plays.

We are still in the early stage of the learning curve, and we will revisit these topics. However, before I wind up this chapter, I have a question for you related to the example we used in this chapter. On day 3, suppose your father in law approaches you and wants to invest Rs.75,000/-, at what rate will you issue the shares to him?

Would it be Rs.10 (initial value) or Rs.10.1034/-?

Key takeaways from this chapter

  • In a mutual fund, different people invest in a collective investment vehicle with a common investment objective
  • Every investor in a mutual fund is treated equally in terms of percentage return
  • At the start of the fund activity, every investor is issued shares/units at a notional value
  • The value of the shares/units change based on how invested assets perform daily

 

163 comments

  1. Dilip savaliya says:

    Pless hindi language me dale this ceptur
    I don’t know English language

  2. Sundeep says:

    Karthik there’s no way anyone is going to get the answer wrong after such a lucid and simple explanation. We would issue the new unit at 10.1034 right?

  3. Bellie Jayakumar says:

    So easy to understand the concepts and looking forward for the subsequent lessons! Keep it up and Thanks!

  4. Navinkumar Gham says:

    Very simple language explaining how mutual funds work. Great

  5. Mubarik khan says:

    Plz in hundi

  6. Vinod says:

    Nice article and explanation. Please post such informative articles regularly.

  7. Dheeraj says:

    Very well explained with relevant analogy. 👍🏽

    Will serve as good guidance for Beginner MF Investors, especially during low CAGR, dull market periods. 👏🏽😊

    Looking forward to the subsequent sessions.

    Thank you.

  8. GyN says:

    Thank you for the detail explanation. I understood what is NAV now and how the mutual fund work.
    Appreciate your efforts.

  9. Gyan says:

    Thank you for the detail explanation. I understood what is NAV now and how the mutual fund work.
    Appreciate your efforts.

  10. Dibakar Bala says:

    Yay! I already knew this. Yet, i feel like I’ve learnt something new today. Thanks for such a detailed explanation.

  11. KP Vidyashankar says:

    Wonderful explanation. Learnt these things with lot of difficulty. Looking forward to AUM and other stuff. Exciting

  12. S Kumar says:

    Great Explanation Karthik.
    I have a query for FOF (Motilal Oswal Nasdaq 100 FOF). Since this fund depends on Nasdaq 100 index, if the Nasdaq is going down will the NAV value decrease? Or will NAV remain constant?
    I am investing INR 20,000 per month in “Motilal Oswal Nasdaq 100 Direct FOF” fund through Coin as international diverfication. Is it a good fund to stick with even when the market goes down?

    Thanks in advance.

    Regards,
    S Kumar

    • Karthik Rangappa says:

      I’m not sure about the fund, Kumar. Will take a look at it though. The NAV will be depended on the Nasdaq value.

  13. Dr Akhilesh Kumar Pandey says:

    Sir I appreciate your efforts for investor like me

  14. Allan Lazrado says:

    Thanks for explaining Mutual Fund concepts in a simple manner with easy to understand examples.

  15. Keshav says:

    Dear sir, what is liquid bees, liquid fund and nifty bees.?. Thanks

  16. Anand Sharma says:

    Lovely content. Thanks!

  17. Neeraj Sangrulkar says:

    Exstatic to learn further. Please do publish next chapter as early as possible.
    Thanx

  18. Satish says:

    Please also explain how do units are calculated and allotted based on NAV. Thanx

  19. Darshan Kapadia says:

    Father in law will be issued units at Rs.10.1034. By doing this, it will equalize the impact of new investor entering the fund. Thanks

  20. Elamparithi says:

    Hi sir,

    Is there any circumstance Allotted NAV in mutual fund will become Zero or Negative Value ?

    Regards
    Elamparithi R

  21. Elamparithi says:

    Sir in previous concerns – the intention is ,the initial Price (i.e) 10.00 of any Mutual fund scheme will turn into Zero or the initial price become Negative (ex: initial price as (-9)) in any of the circumstance .

    Elamparithi says:
    January 7, 2020 at 10:19 am
    Hi sir,

    Is there any circumstance Allotted NAV in mutual fund will become Zero or Negative Value ?

    Regards
    Elamparithi R

  22. vinod namdeo says:

    1. how frequent and at what time any fund manager can withdraw am
    ount from any stock and invest to other stock.
    2. can fund manager withdraw and invest fund on intraday basis or in F&O.
    3. for how much period, my deposited amount can not invested in any stock by fund manager.

    • Karthik Rangappa says:

      1) It is upto the FM. He can trade and invest like anyone of us
      2) F&O is allowed to hedge and do arbitrage
      3) Upto the fund manager’s discretion

  23. Akash says:

    You said that “You are permitted to treat these individuals differently in terms of service provided”. How MF AMCs treat different investors differently in terms of service provided?

  24. Sudip Rana says:

    If buy a share, there STT is 0.1%. So, how is it possible expense ratio of mutual fund 0.1% ?

  25. rohith says:

    1.what if one gets to invest in a stock were he required more or less than 27,500(according to example )
    2.in example the calculation of share price * number of shares ,i think you got it wrong 234*118 = 27,612 (the whole table)

    • Karthik Rangappa says:

      Let me relook at this, but you do get the concept right? That is the key message here 🙂

  26. rohith says:

    thank you sir and what if one gets to invest in a stock were he required more or less than 27,500(according to example )

  27. rohith says:

    thank you sir , your doing great .

  28. Sureshkumar says:

    Thanks for your efforts…
    What would be the new notional value (day2) if the investment value becomes 265000 instead of 277844?
    How it would be calculated?

  29. Shuvodip Majumdar says:

    Dear Karthik Sir,

    Let us consider two mutual funds. MF 1 has an AUM of Rs. 400 Crore and NAV of Rs. 400/-. This means that there are 1 Crore units of MF 1. Now MF 2 has an AUM of Rs. 200 Crore and NAV of Rs. 2000/-. So, MF 2 has 10 Lac units. Say, both of the funds are giving same percentage of returns over a particular period of time. Now can this “number of units” thing be a deciding factor from the point of view of choosing a fund? If yes, please tell why. I found such a situation in – https://www.moneycontrol.com/mf/etf/.

    Thanks in advance.

    • Karthik Rangappa says:

      No, the number of units outstanding is just a technicality and has no impact while selecting the fund.

  30. Pratheek K C says:

    plz upload pdf version for entire topic of “Personal Finance”.

  31. Rohan says:

    Karthik I didn’t see the Personal finance course on the varsity app, so please upload this too on the app and also include Mutual funds certification on it.
    Love this Module and enjoying learning with Zerodha.

    • Karthik Rangappa says:

      Rohan, the module on personal finance is still work in progress. This is will be uploaded to the app once the module is complete. I’m glad you liked the content 🙂

  32. Sandip says:

    So total expense ratio 1.04% means does it gets apply everyday ,is it right?
    i.e every day expenses =days Asset value *1.04%

  33. Sk says:

    So then i think mutual funds are great for investment because let’s say if i invested 1 lac in MFs ,
    Because of people’s pool money and its gets invested in diversified stocks even if my 1lac invested didn’t perform well in stocks but remaining people’s money invested performed well thats going to benefit me…if i would have invested 1 lac on my own it would not have do well or might be more likely to not perform well…but the Mf collective pool and diversification i am going to benifit.
    Is that right hypothesis…my risk gets reduced in mfs?

    • Karthik Rangappa says:

      Its not entirely correct. Lets say I have invested 10K and you have invested 1L in the same fund. The fund loses 10% value, then both our losses will be 10%…mine will be 1K, yours will be 10K, but 10% applies to both of us.

  34. Jeganath T says:

    Dear Karthik,

    Your use of examples makes the entire concept very simple. Could you please share how should we judge a mutual fund manager as his judgement and experience matters the most?
    Any parameters or benchmarks which is available online? How do you rate a fund manager?

    • Karthik Rangappa says:

      That’s a very tough call. When you look at a fund, you need to look at the fund objectively since taking a call on the fund manager will be really tough.

  35. Amit kumar says:

    Thank you for enriching our knowledge about mutual funds. I feel more aware informed.

  36. Mandira says:

    Sir, kindly share the pdf.plz..

  37. Raksha says:

    In the formula of NAV, what does the expenses include? How much is it approx?
    Also, very well explained. Continue with such good work!

  38. Karthik S says:

    Hi Karthik,

    As per this formulae (Value of all the assets – the expenses)/number of shares (units). In the above scenario number of shares or units is number of shares distributed(notion value) to family members?

  39. Snehal says:

    Thanks a ton for this article.

    ◦The value of the shares/units change based on how invested assets perform daily

    Q1-On Day1 if NAV=10 and units=50 and on Day2 if NAV=12, then also Units will be 50 only…Right ?
    Q2-If new investor/existing investor comes with 500/- then Units will be calculate as 500/12=xxxx)..Right ?

  40. Snehal says:

    Thanks a bunch.

  41. Nazeer says:

    Hello Karthik,
    How you calculated new notation value with the given profit?
    New notional value (day 2) – 10 *(1+1.0340%) = 10.1034
    Explain the above calculation more detailed

  42. Shivam says:

    Just turn on Google translate when you are on Varsity webpage modules. Glad this will help.. 🙂

  43. Gurudutt Kini says:

    So if i give this ‘investor’ Rs. 1,00,000 /- today and if the notional value for today is say 10.1212%, I will get shares for 10.1212% ?

    • Karthik Rangappa says:

      You mean a notional increase of 10.1212%? Yes, in that case, you will get the incremental value along with the original investment.

  44. Srushti Makhija says:

    Are we expected to invest in mutual fund after looking at NAV?Do we have option to see past NAV?

  45. Anonymous says:

    Next and previous buttons at the top and bottom of the article will make navigation simpler.
    Also, if the sites remembers which articles user has read and marks them, it would be awesome.

  46. Sonu Agarwal says:

    Hey Karthik,

    Understanding Mutual Funds had been a rocket science all this while for me and with this article and the previous one, i have now a very clear what this is now. I wish i had read this one way earlier than now so that i could have started my investments into Mutual Funds, but as you had explained in your previous chapters it is never too late to start investing. Thank you so much for this.

  47. Avinash C says:

    Hello Sir,

    You’ve explained the topic very well, easy to understand, especially when it involves these tables and stuff.

    The only part that I didn’t get is how did we calculate the Day 2 notional value, I didn’t understand the formula you used, can you please explain it.

    • Karthik Rangappa says:

      Thanks Avinasah. The calculation of notional value is simple (have explained in the chapter itself). Which part is confusing you?

  48. Avinash C says:

    10 *(1+1.0340%) = 10.1034

    Correct me if I’m wrong
    1. 10 == Notional Value
    2. 1.0340 == Percentage change on Day 2

    The only part I didn’t get is what is ‘1’ that is added to the Percentage change and why did we add it. If you could please explain, that would be helpful.

    • Karthik Rangappa says:

      Ah, that 1 is a mathematical formula to calculate the new value. Expand the equation and you will know 🙂

  49. Deepak says:

    Excellent job Karthik. I have sent you a message of appreciation on Instagram as well.

  50. aarti says:

    sir does that mean the initial notional value is same as face value of a share? And NAV is like current trading share price of a company? Also sir in order to judge the performance of a company we generally look at the historic share price of the stock and its CAGR(10yr, 5yr etc.). So, as far as AMCs are concerned can we check their past performance comparing its NAV 10yrs Vs. Now? If yes then where can I find such information?

    • Karthik Rangappa says:

      Thats right. The value of the NAV will depend on the market value of the securities in the scheme’s portfolio. Later in this module, I’ve suggested few methods to evaluate the mutual fund, you should take a look at that 🙂

  51. Harsh says:

    Hello Sir, It’s really wonderful how you explain these concepts with such simplicity.

    I think, practically, father in law would be issued shares, neither at 10 nor 10.103

  52. Harsh says:

    Hello Sir, It’s really wonderful how you explain these concepts with such simplicity.

    I think, practically, father in law would be issued shares, neither at 10 nor 10.1034, but at the the notional value of day 3. Am I right?

  53. Harsh says:

    The NAV of day 1 was 10 and day 2 was 10.1034. The NAV for day 3 will be calculated after the market close on Day 3. On that NAV, the shares should be issued to father-in-law.

    Am I right or am I just confused somewhere?

  54. Dushyant raghuvanshi says:

    well explained with full clarity. Thanks for this karthik sir

  55. Anil says:

    very nice approach for explaining a concept. please continue

  56. Dounil Dharod says:

    Wonderful and simplified explanation. I love how you explain things from scratch which we’ve been hearing since years. But I’m still confused on –
    1. Whether buying/selling of MF affect the NAV. If yes, how would it be calculated?
    2. What happens to NAV if there are more buyers than sellers or vice versa? Do market forces and value of investment both affects the NAV? If no, who buys if there are more sellers?

    • Karthik Rangappa says:

      1) No, it does not.
      2) Nope, unlike a stock, the demand and supply do not directly impact the NAV.

  57. T K Singh says:

    Hi,

    (1) NAV for a mutual fund reflects latest value of invested share and is revised each day. I want to get clarity that the NAV for my mutual fund in the morning is based on previous day closing value and same day opening value of stocks ?

    (2) How can I time my investment best in Mutual fund to maximize returns ?

    • Karthik Rangappa says:

      1) Its based on the previous day’s closing.
      2) Multiple research has pointed towards SIPs as the best way to deal with MF investments.

  58. Gopalan P G says:

    Good day Mr.Karthik,
    MF, your explanation is very interesting. Is it possible, an investor withdraw his investment after a month or so? If so, how do we calculate the total investment? suppose we informed the investor the activities on daily basis, first of each month, and he wants to withdraw on 5th
    can he claim the amount till 5th or until month end.
    Secondly, another investor wish to add fund on 6th, do we want to maintain another account with notional value 10/-?
    Do we ask the investor, the period of which he wants to invest b4 starting the MF?

    • Karthik Rangappa says:

      Yes, you can. To do so, please look at the overall number of units you own and apply to redeem these many units. Thats it. Same with adding funds.

  59. Harini says:

    Hi Karthik, all of this is so wonderfully explained, was wondering if a deep diving into insurance pricing, especially ULIP’s is something that can be dealt with by Varsity.

  60. sakshum jain says:

    Higher the NAV more the return?

  61. Girish says:

    I wonder if standard textbooks cannot be so lucid in explainong topics. Good work Mr Karthik

  62. Ganesha says:

    I have a flexi cap fund, where the current SIP is stopped because the fund is not performing as expected.

    Should I redeem my NAV? or hold for any additional benefits as it grows in future?

    • Karthik Rangappa says:

      Ganesh, this depends on why you invested in SIPs in the first place and why invest in this fund. Ideally, SIPS should be for the super long term and should not be liquidated basis short term performance.

  63. Ganesha says:

    Hi sir, I did invest in to diversify my portfolio. But the measure of alpha or beta is very low over a period of 6-8 months. So I stopped or paused my SIP. And altered my investment, keeping this fund ideal. I can leave it for long-term but not sure if there’s any unit’s charged for not contributing to the fund

    • Karthik Rangappa says:

      Ganesha, I dont think you should alter the SIPs once you start. The idea with SIPs is to keep continuing it regardless of all the short term noise.

  64. Divya Chugh says:

    It would be issued at 10 rupees rate na? That is the basic rate we assume? Why would we consider the appreciation of 1.034% for new issue?

    • Karthik Rangappa says:

      It would be issued at 10, but after that the NAV grows right? The growth rate for that particular day is 1.034%.

  65. Janki Patil says:

    Very simple and lucid. I still cannot calculate the percentages.Is it possible to explain step by step.

  66. Anup says:

    hey how does the NAV changes and the change is propogated during the event of Re-balancing

    • Karthik Rangappa says:

      NAV changes on a daily basis, Anup. The AMC declares the updated NAV on a daily basis.

  67. Anup says:

    I meant, eg. as per example given in the article, lets say as a fund manager of my family fund i decided to completely liquidate “Stock 10” worth of 28292 on Day 3 then what will happen to the liquidated amount? does it affect the NAV in any way?

    • Karthik Rangappa says:

      Yes, that will have an impact on the fund. But its treated as the same was stock 10’s worth increasing or decreasing on any given day.

  68. Ganesha says:

    But what about rebalancing? Should we do it on mutual fund?

    What if the fund give same return as index? Or if it gives lesser than index?

    Please clarify

    • Karthik Rangappa says:

      Yes, you can rebalance your MF portfolio. I will try and put up a chapter on this sometime soon.

  69. Aakash says:

    Thanks for this easy and elaborative explanation. 🙂

    I am having a doubt:
    In the above given example, there are 5 persons who have invested in the Mutual Fund.
    Now fund Manager will invest the total of 2,75,000/- in stocks etc to generate the profit for their investors.
    Now let’s say after 3 days, Uncle wants to withdraw from this Mutual Fund scheme, and wants his 65,000/- (or whatever the value of that 65,000/- is at the end of 3rd day) back.
    Now, at this moment Fund Manager will have to sell some of the stocks to repay back to Uncle.
    So, how withdrawl of money by 1 Person(Uncle) will impact the other people(Aunt,Cousin1/2, Nephew)?
    Thanks

    • Karthik Rangappa says:

      Aaksha, for this reason, MFs have a cash component that they tap into for accommodating withdrawals and redemptions.

  70. Natharsha says:

    We give to last nav amount but reduced the unit quantity

  71. RJ says:

    you have a brilliant way of simplifying any dreaded concept . Totally in love with the teaching style!! please keep up the good work !!
    Also, the answer I am guessing is 10.1034 ? just because it is associated with NAV and we all buy at NAV only
    Assumed Explanation : Since the fund has performed well the account now holds the new value 277,844 /- and we need to invest it completely for equal distribution and ease of maintaining records ?? Please clarify why 10.1034 and not 10 ?

  72. Vishal Sharma says:

    Can a mutual fund’s demand also impact it’s NAV? Just like in case of stocks the price can increase if it’s demand is high, can such demand-supply dynamics also affect mutual funds?

  73. Gaurav Gupta says:

    If i order is set on Sat(16th Oct 2021) and for eg the NAV was 44 at that time.But on monday the NAV went to 43.5.
    So which NAV will me allotted to me.

  74. Adithya Shourie says:

    Hi Karthik, How are you?

    I have a doubt regarding NAV. Based on what you have explained in the last few paragraphs, does it mean that higher the NAV (on average) the better? If so, should one invest in that Mutual Fund?
    Thanks

    • Karthik Rangappa says:

      Not really, but of course, you want the NAV to go higher after you invest. But NAV should not be the focus point of your investment decision in a mutual fund.

  75. Arvind Kumar says:

    Dear Sir,
    Your account on personal finance and mutual funds is riveting like a nice story telling. Thanks for bringing in so much of clarity on the subject. Kindly clear my doubt on this topic of Concept of Fund and NAV:
    In the example given above if one of the member wants to redeem his entire units but none of the existing or new investor wants to buy more units then who will pay the amount to the member who is redeeming his units? Will the fund manager pay it or fund house will borrow money from any lender? Pl clarify this point.

    • Karthik Rangappa says:

      Thanks, Arvind, glad you liked the content. In such a case the fund has to do this. As an AMC, they are supposed to fulfil these obligations. For these reasons, AMCs maintain cash position to service redemptions.

  76. Yashwanth says:

    Hi Sir, I was going through the Nifty chart as well as the ICICI Pru / UTI Index fund N.A.V chart. I have taken the starting and ending dates as : Dec,2020 – Dec,2021. What I have found out is that, Nifty has gained 30.5 % over this period , whereas the N.A.V of the fund has grown 24.8% . I understand that some of the percentage here is lost due to expense ratio, but since this is an index fund( direct ) expense ratio being 0.1 % shouldn’t be effecting much. But still, the difference is over 5 % which is very huge for just 1 year period. Can you please explain why is that? Am I missing something here ?

    • Karthik Rangappa says:

      I guess a few percentage points can be attributed to both the expense ratio and the tracking error. But as you said 5% is on the higher side. Let me dig up more information.

  77. Pradeep says:

    Response to Yashwanth – Index Funds are designed to move alongside the Nifty Index. However, we’ll see that the fund does not have the exact return percentage as the Index. As you guessed, one reason is the expense ratio. The funds are independently managed by to closely align with the index, however, it is possible that the fund outperforms/underperforms the index. Be sure to check the ‘Alpha’ of the fund.

  78. Himanshu says:

    Can you make a module on how to invest in IPOs? Like what to look for in the DRHP and all that stuff? It would be really helpful. PS: Great job making these modules!

  79. Yashwanth says:

    Hi Sir, did you get a chance to look into the scenario we discussed above? – 5% difference in returns between Nifty chart and Nifty 50 Index fund within a span of 1 year

    • Karthik Rangappa says:

      I did, I think between two random points, sometimes tracking might seem high due to various reasons like flows, corporate actions etc. Don’t know where you are checking, but the generally the difference is not much.

  80. Rishav Pandit says:

    why the new notional value i.e. day 2 is calculated in the compound interest formula?

  81. Amit says:

    Hello Karthik Sir,

    I am big fan of varsity and of course you . Lots of love !
    Q. suppose a mutual fund contains share A in its portfolio and I buy some units of mf. Tomorrow , company removes share A from its portfolio and add share B to mf portfolio. As I have purchased this mf in the past and holding it , would I be invested in share A? Can company sell portion of share A allocation which I have blocked by purchasing some units earlier and replace it with share B ?

    • Karthik Rangappa says:

      Thanks for the kind words, Amit. Yes, the MF can choose to sell either the complete holding or part of the holding. It is up to the AMC.

  82. Satish Pushola says:

    Hi Karthik sir, very nicely explained in lay man level. Thanks a lot !hh

  83. sorabh says:

    Dear Karthik sir,

    Awesome chapter !

    i have a mathematical question here, please guide .

    suppose now new person( Father in law) comes in ur above list with 75000 rupees.
    he will be getting new units at 10.1034

    *Here i am getting stucked (i know its a stupid question, but i am not afraid to ask from my teacher karthik)*
    now, if i am adding 75000 in existing fund 2,77844, suddenly NAV is getting reduced in Excel as it is getting derived ROI from total capital…….

    i hope i am able to make my stupid query understand ,please help to resolve sir…….

    Jai hind
    sorabh dhiman

    • Karthik Rangappa says:

      Not sure if I understand your query completely Sorabh. The new fund makes no difference as it will get used in buying more stocks.

  84. Tanuj says:

    HI Karthik,

    Great article !
    Had a question, notional value is used during NFO only right ? and then it becomes the NAV after that ?

  85. subramanian murugesan says:

    Dear Karthick, Good morning, from yesterday only i am reading your modules. I read only 4 modules. Very much happy. Detailed explanation with examples in real life, is very good.
    I am thinking of studying your modules and follow the modules further to get more knowledge.
    I request you to continue your teachings,
    Thanking you,
    subbu.

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