When it comes to investing, risk tolerance is an important component to consider. Depending upon your risk taking ability, you can decide your asset allocation to reach your financial goals.
When you invest according to your risk profile, you will be in a position to manage the swings in your investment performances effectively. When it comes to mutual fund investments, there are funds available to suit each type of investor with different financial goals, risk profile and time horizon.
Before you invest in a mutual fund scheme, you need to first consider a few points and to be clear about them.
1) What are your financial goals?
You may have many financial goals right from some short-term goals like buying a car, paying school fees to medium-term goals like buying a home, family vacation and long-term goals like retirement planning, children’s higher education and marriage. You need to plan separately for each goal.
2) How much do you need to save to reach your goals?
When your goals are clear, you can estimate how much you would need to save today to reach there after considering the inflation.
3) What is the time horizon you keep to achieve these goals?
Time horizon that you have to reach at your goals is an important consideration while investing. There are mutual funds that are particularly meant for short-duration and there are also funds for long-duration goals like retirement.
4) What is your risk taking ability?
Your willingness and ability to take risk defines your choice of investments ultimately. Your current age, number of dependents, annual income, amount that you have set aside as emergency fund, amount that you can invest monthly, liquidity requirement, your willingness to take risk and return expectation etc are some of the key factors that define your risk profile.
Based on your risk taking ability, your asset allocation needs to be done. You can seek the help of financial experts to know your risk profile. Your risk profiling can be done with a simple questionnaire.
When you understand your savings requirement based on your financial goals, time horizon and risk profile, you can start knowing the suitability of each type of mutual fund with different risk-return characteristics as per your requirement.
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Selection of mutual funds as per your risk profile and asset allocation
You can choose the funds based on your risk profile and defined asset allocation for you across various asset classes like equity, debt, gold and real estate etc.
1) Aggressive/dynamic investor
You are an aggressive investor which means you are willing to take high risk in investments that have higher volatility. In such cases, you would also expect higher returns for maximising your wealth.
Equity mutual fund category is the ideal choice for your risk profile. You can consider to invest in some small-cap and mid-cap equity funds that come with relatively higher risk and potential for higher return.
You can also consider some sector funds that invest in stocks of particular sectors. Mainly, you need to also consider the investment horizon to reach your goals.
Equity mutual funds are well suited for capital appreciation and to achieve long-term goals. In case you have to invest for medium-term goals you can consider investing in equity-oriented balanced funds.
You can also consider investing a portion of your money into debt funds keeping in mind your short-term goals and liquidity requirements.
2) Balanced investor
You are a balanced investor, which means you are willing to take medium risks while investing. You would prefer to invest in financial avenues that are not highly volatile.
Medium-risk investors like you can consider to invest in equity mutual funds like bluechip funds or large-cap equity funds that invest in stocks of well-established companies for your long-term goals like for retirement corpus.
Though equity involves high risk, it can perform well over the long-run. You can also consider to invest in funds with a diversified equity portfolio. For your medium-term goals, you can consider investing in hybrid funds.
As hybrid funds invest in both equity and debt in an almost equal proportion, this can very well suit your asset allocation preference and risk taking ability. You can also invest a part of your money into short-term debt funds for liquidity purposes.
3) Conservative investor
You are a conservative investor, which means you are a risk averse or an investor with low risk preference. While investing, you would prefer avenues that can offer your stability and income rather than capital appreciation and growth.
You can consider investing in long-term debt funds for your long-term goals. You can consider retirement savings funds or pension funds. For regular income, you can consider investing in income funds. Credit risk funds can also be a good choice for your risk profile.
Defining asset allocation based on your risk profile is extremely important to successfully reach your financial goals. While selecting the best suitable mutual funds as per your risk profile, it is also important to consider your existing asset allocation and investments in other financial products.
When it comes to investing in mutual funds, there are two ways in which you can start your investment – Lump Sum or systematic investment plan.In case of lump sum investment, you invest your money in a scheme in one go. In the case of systematic investment plans, you make a fixed amount of investment at regular intervals for a particular period. Systematic investment plan is the best way to cultivate a regular savings habit in you.
Systematic investment plan is a tool to invest in mutual fund schemes regularly in a disciplined manner. Systematic investment plan allows you to invest a fixed amount of money every month on a date chosen by you into your preferred mutual fund scheme for a predefined period.
You can choose the convenient day for you to make payment at the time of buying mutual funds. Monthly investment amount will be directly debited from your account on the date chosen through ECS (Electronic Clearing System) facility.
Typically for equity mutual fund investors, systematic investment plan is an effective tool to save for long-term financial goals.
When you choose a systematic investment plan as a tool to invest in mutual funds, your fund savings will be done through periodic instalments.
Every month when the investment amount is paid, fund units are allocated based on that day’s prevailing net asset value of the scheme. Every instalment of SIP is considered as a fresh purchase. Many mutual fund houses allow monthly, fortnightly and bi-monthly instalments in SIP.
There are various types of SIP options with which you can customize. Following are the types available –
1) Top-up SIP
In this, you can enhance your SIP contribution during regular intervals. For example, you have started a SIP of INR 1,000 into a mutual fund scheme when you just started your career. Let’s say you have received a pay increment after your probationary period, you can increase your SIP amount to 1,500 under top-up SIP facility.
2) Flexible SIP
Flexible SIP allows you to change the SIP amount based on your financial position. If you receive a bonus you can divert the amount to your SIP account. In case of a cash crunch, you can even reduce your SIP amount.
3) Perpetual SIP
This is a systematic investment plan with no end date. If you have to stop them anytime, you need to give a written request. This is an ideal option for investors who need continuity in investment into the scheme.
What are the benefits of systematic investment plans?
Investing in mutual funds through SIP mode is a smart choice for a variety of reasons. There are various benefits offered by systematic investment plans. Following are the benefits of systematic investment plans –
1) Disciplined investment practice
Discipline is an essence of investing success. As a systematic investment plan allows you to invest regularly in periodic instalments as per your monthly savings capacity, it inculcates a regular savings habit in you. SIP is based on the principle of disciplined savings which helps you continuously save for your future goals without being impacted by market emotions.
Investing in a phased manner also helps you conveniently save on a regular basis.
2) Offers diversification
As investing through a systematic investment plan helps you buy units of mutual funds at different phases of the market, your risk in the investment gets diversified. SIP helps you reach your long-term goals by earning a good amount of return at reduced risk.
3) Rupee cost averaging
As you make periodic investments through systematic investment plans, you would be buying mutual fund units at different costs each month. You buy more units when the market falls and the NAV reduces. This brings down the average cost over the long-term. Rupee cost averaging of systematic investment plans helps you take the advantage of market volatility.
4) Power of compounding
Investing regularly in a disciplined manner through systematic investment plans over a longer period of time helps you magnify your investment by compounding effect. As the gains in your portfolio gets reinvested and the compounding growth will lead to wealth maximisation over the long-run.
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Systematic investment plan routes of investing in mutual funds allow you to make even smaller amounts of savings on a regular basis. As low as INR 500 is allowed to invest in systematic investment plans.
With this convenience offered by SIP, you can start investing at the early age of your life. Power of starting early helps you build significant wealth over the long-term.
As a systematic investment plan does not strain your daily finances, helps you do disciplined savings, minimizes risk with diversification and gives you advantage of market volatility, it would be a smart choice for your long-term mutual fund investments.
Mutual funds are one such investment avenue that is easy to understand and convenient to invest in. Buying a mutual fund in India is very simple and easy.With the evolution, the online process of buying mutual funds has become more popular in India which helps you invest in funds that you desire in no time effortlessly. With the good accessibility of mutual funds, there are multiple ways through which you can buy mutual funds.
Before understanding the buying process of mutual funds, it is important for you to have the checklist of documents ready. Following are the documents that you would require to start investing in mutual funds:
1) PAN card
2) Bank account
You require a bank account with net banking facility for online purchase
For offline purchase of mutual fund, a personalized cheque leaf (cancelled) with IFSC code, MICR code. You can also produce a bank passbook or bank account statement as proof.
3 ) KYC (Know Your Client) documents
KYC (Know Your Client) is a compulsory requirement by the regulator Securities and Exchange Board of India (SEBI) in order to prevent money laundering under Money Laundering Act, 2002.
You need to have your KYC verified with the intermediaries registered with the Securities and Exchange Board of India (SEBI) before starting investing in mutual funds. This mandatory requirement of KYC verification by SEBI is a one time process.
KYC needs to be registered with KYC Registration Agencies (KRA). You can initiate registration with mutual fund distributors, mutual fund houses or directly through KYC Registration Agencies (KRA) online. Following are the KRAs in India registered with SEBI –
CDSL Ventures Limited (CVL)
NSDL Database Management Limited (NDML)
DotEx International Limited (DotEx)
CAMS Investor Services Private Limited
Karvy Data management Services limited
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For registration of KYC, you need to keep certain documents ready. Following are the documents required –
Proof of identity – PAN card/Driving license/ Passport/Voter ID/ Aadhaar card etc.
Proof of address – Passport/Ration card/Driving license/Bank account statement/lease agreement etc.
Passport size photograph
Enclose self-attested documents along with filled and signed KYC form. Your documents will be verified in person with the originals.
Step-by-step process for buying mutual funds
If your KYC is not registered, you can also get the eKYC done. You can do it through the online platform of KYC Registration Agencies (KRA) with a few simple steps –
Visit the website of KYC Registration Agencies (KRA)
Click on register for eKYC
Fill in the KYC form
Input your UIDAI number and mobile number
Input the OTP (One-time password) received on mobile to verify
Accept the terms and conditions and complete the process.
Once your KYC is registered or eKYC is done, you can start investing in mutual funds. You have two modes to buy mutual funds – online and offline. Online mode is the most preferred mode to buy mutual funds nowadays than the conventional offline method of buying mutual funds.
Once you decide in which fund to invest in, you can follow the simple process of buying mutual funds mentioned below –
Offline method for buying mutual funds
You can visit specific mutual fund house offices, branches of distributors or brokers to avail mutual fund forms. You can fill in the forms with complete details of investment type (Lumpsum/Systematic investment plan), mode of payment, bank details and holding type. Enclose the payment cheque/demand draft along with the signed form and submit it. You can submit the documents directly at the point of sale of registrars like Karvy or CAMS.
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Online method for buying mutual funds
You can conveniently buy mutual funds online in no time through many platforms. Following are some of the ways to buy mutual funds online –
Through AMC (Asset Management Companies): You can visit the website of fund houses and start investing your desired choice of funds if your KYC is already verified. There are some fund houses that provide mobile applications for purchasing mutual funds.
Through Intermediaries: Intermediaries like banks and stockbroking companies offer you an online platform to invest in mutual funds. You can log in to their net banking facility or Demat account facility and follow the procedure of buying online.
Through online portals: There are many online portals and Fintech companies who are tied up with many AMCs. You can choose a fund of your choice and invest online through their portal.
By investing mutual funds, you can create a diversified and comprehensive portfolio that can help you meet your various short-term and long-term financial goals.As mutual funds offer you variety of plans that can suit your risk appetite and investment need. Understanding the types of mutual funds available will help you make an informed choice.
Mutual funds are categorised into various types based on the asset class, structure, investment strategy, and speciality and many such factors.
Here is a comprehensive guide on the classification of mutual funds and various types of mutual funds available under each category.
A. Classification of mutual funds based on the asset class
Mutual funds are mainly classified based on the types of underlying assets in its portfolio. The following are the classification of mutual funds based on the asset class
1) Equity mutual funds
Equity mutual funds are the mutual funds that primarily invest in stocks. Equity mutual funds involve high risk in comparison to other funds and are mainly suitable for investors with high-risk appetite and of long-term investment perspective.
Equity funds are further classified into various types depending on the types of stocks and investment style. Following are the main categories of equity funds –
Large cap funds
These funds invest 80% of your money into stocks of large-cap companies. By investing in blue-chip companies, large-cap funds offer you the stability to a larger extent along with the good potential for growth over the long-run.
Mid-cap funds mainly allocate your money into equity and equity-related instruments of mid-cap companies. As these companies can good growth potential, you can expect a higher return with higher risk over the long-run.
Small cap funds
Small cap funds allocate a minimum 65% of your money into stocks of small-cap companies. These funds come with the highest risk and also holds the potential to generate high returns.
These are the most diversified funds that invest your money into all types of companies’ right large-cap to small-cap. This can offer you considerable return as risk is diversified.
Fund managers of value funds mainly follow a value investing strategy wherein he identifies the value stock to create a portfolio. This can offer you long-term wealth creation opportunity.
Sector-specific funds mainly focus on stocks of the specific sector for investing the major chunk of pooled money. For example, investing in IT stocks and pharma stocks etc.
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2) Debt mutual funds
Debt Mutual funds are the type of mutual funds that primarily invest in debt instruments like treasury bills, bank deposits and other fixed-income bearing securities. Debt funds are further classified as –
Liquid funds invest mainly in money market securities like call money, treasury bills and certificate deposits of up to 91 days maturity. These funds are highly liquid, very low risk and are an ideal choice to park your excess corpus for a shorter period.
Short duration funds
Short duration funds invest in fixed income securities with maturity ranging between 1 year and 3 years. Short duration funds are an ideal choice for you if you are a conservative investor with a short-term goal.
Medium duration funds
Medium duration funds invest in fixed income securities with maturity ranging between 3 year and 5 years. You can expect a moderate return with capital protection.
Long duration funds
Medium duration funds invest in fixed income securities with a maturity of more than 7 years. You can expect a relatively higher yield.
Credit risk funds
Credit risk funds primarily invest in the highest rated debt instruments.
Dynamic bond funds
Dynamic bond funds are actively managed by the fund manager by investing in debt instruments across the duration depending on the interest rate scenario.
3) Balanced mutual funds
Balanced mutual funds are hybrid in nature as they invest in both equity and debt securities in a significant proportion. Balanced funds can offer to moderate to a good return.
B. Classification of mutual funds based on the structure
Mutual funds are classified based on their structure which defines the flexibility it offers to you as an investor. Following are the types of mutual funds categorised based on the structure –
1) Open-ended mutual funds
Open-ended mutual funds are the type of mutual funds that can be purchased and redeemed anytime. There is also a restriction on the upper cap for investing open-ended mutual funds. These funds do not come with any predefined time frame or maturity period.
The net asset value of open-ended mutual funds is declared on a daily basis. You can invest or redeem open-ended mutual funds based on the NAV prevailing on that day which makes them the most liquid. As there is continuity in investment, the historical performance of open-ended funds can be easily tracked and referred for making investment decisions.
2) Closed-ended mutual funds
You can subscribe for closed-ended mutual funds during the New Fund Offer (NFO) period. Fixed number of units are allocated and you cannot redeem these units till the completion of maturity period. Though closed-ended mutual funds are not liquid in nature, they offer stability. In the case of closed-ended funds, you cannot sell back your fund units to the mutual fund houses. These funds are listed and traded on an exchange just like exchange-traded funds.
3) Interval funds
Interval funds swing both sides with the characteristics of both open-ended mutual funds and closed-ended mutual funds. These funds are open for investment only at specific time intervals as directed by the mutual fund houses as they invest mainly in unconventional and illiquid assets.
C. Classification of mutual funds based on investment strategy
The following are the classification of mutual funds based on their investment strategy –
1) Growth mutual funds
Growth mutual funds are primarily based on growth investment strategy. The main of these funds is a capital appreciation by investing in growth stocks.
2) Liquid funds
Liquid funds are based on the strategy of offering high liquidity to investors.
3) Income funds
Income funds are a type of debt funds that intends to offer regular income to the investors. If you are a conservative investor looking for regular income option, you can consider income funds.
4) Tax-saving mutual funds
Tax saving funds or ELSS (Equity Linked Savings Schemes) are equity-oriented funds that are designed to provide you tax benefits under Section 80C of the Income Tax Act, 1961. These funds come with three years lock-in period.
5) Pension funds
Pension funds are primarily based on a long-term investment strategy that can help you draw monthly income or pension after retirement.
6) Fixed maturity funds
Fixed maturity funds invest mainly in bonds and debt securities that allow you to invest for a particular period ranging from one month to five years.
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D. Classification of mutual funds based on speciality
Following are the classification of mutual funds based on their speciality –
1) Index funds
Index funds replicate the performance of a particular index such as NSE 50 or Sensex. These are passively managed funds.
2) Gilt Funds
Gilt funds are the funds that invest predominantly in government securities. These are funds with almost no risk.
3) Global funds
These are the funds that invest in markets across the globe, including India. These funds are unique and diversified which can offer you a potentially high return over the long-term.
4) Fund of funds
These are funds that invest in other mutual fund schemes and offers you diversification by spreading the risk.
5) Exchange-traded funds
Exchange-traded funds are the type of index funds that are listed and traded on exchange-like equity stocks.
Knowing the wide variety of mutual funds available and understanding each one of them can help you take an informed decision.
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Mutual funds are the ideal investment choices for investors who do not directly want to invest in the capital market. As an investor, you can easily find a mutual fund investment option that suits your investment goals, income, risk appetite and returns expectation. Before you understand the various mutual fund options available and how to invest in it, it is essential to know the benefits of investing in mutual funds
Following are the top 10 benefits of investing in mutual funds
Mutual funds are investment options with a simple structure that every investor can understand. To invest in a mutual fund and become successful, you don’t need to have experience, expertise and complete knowledge of financial markets. Investing in mutual funds and redeeming them is incredibly easy which requires no market expertise.
2) Professional management
Mutual funds are managed by a team of experts. Each mutual fund scheme is managed by fund managers who take care of building a fund’s portfolio, buying, selling and managing full time using their market expertise.
Fund managers also constantly do extensive research and analyse the financial market while taking buy/sell decisions in order to protect your wealth.
You can simply start investing in mutual funds without mastering in finance as a growth and performance of your mutual fund investment will be professionally managed and monitored by fund managers.
3) Easily accessible
Mutual funds are easily accessible through mutual fund companies, banks, brokerage firms, online brokers and insurance companies. With the online process of buying, you can invest in mutual funds without any hassles online.
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4) Offers diversification
Diversification of risk is one of the biggest benefits offered by mutual fund investments. As mutual funds invest in various securities, there are a variety of risks involved such as market risk, credit risk and interest rate risk etc.
However, in mutual funds, you make indirect investments into the financial market instead of directly investing along with other like-minded investors.
Fund managers invest in a variety of stocks and securities in a mutual fund portfolio, your investment risk is diversified across different sectors. When compared with stocks, mutual fund investments are more diversified.
Expenses or cost involved in managing an actively managed mutual fund portfolio is relatively lower than the cost of managing a portfolio of individual securities.
When you invest in mutual funds, you will have to incur fund management charges of up to 2.50%. Some of the mutual funds that come with predefined time frames may have some exit load which you need to incur if you redeem before the predefined time frame of the investment.
However, the cost involved is lower when you compare it with the transaction cost and brokerage involved in regular stock investing.
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6) Smaller capital outlay
When it comes to stocks, you need to have a large corpus to create a diversified portfolio of individual stocks. On the other hand, in mutual fund investment, you can own a diversified portfolio of securities with even a smaller capital outlay as mutual fund work on pooling of money. When you are investing a lump sum in mutual funds, you can even start with INR. 5,000. When you are investing in mutual funds in a disciplined way i.e. a systematic investment plan, you can start with as small as INR 500 monthly.
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7) Product variety
There are a variety of mutual fund schemes available that come with varying risk-return characteristics to suit your varying needs. You can choose a mutual fund scheme that is suitable for risk profile, time horizon and investment objective. For example, there are monthly income plans in mutual funds which addresses your regular income requirement at minimal risk involved.
8) Flexible investing
Mutual fund investment offers you many flexible investing options such as lump sum investment, systematic investment plan, systematic withdrawal plan and dividend reinvestment etc. Many mutual funds do not come with predefined time frame which offers you the flexibility to redeem anytime to meet urgent liquidity requirements.
9) Well regulated
Mutual funds in India are well regulated by well-known regulatory bodies like Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). Every mutual fund trust needs to be registered with the Securities and Exchange Board of India (SEBI) and the guidelines are given by the SEBI needs to be followed by the mutual fund companies.
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Mutual funds offer you transparency by disclosing every detail related to a mutual fund scheme fact sheet. Monthly factsheets of mutual funds help you keep a tab on all your mutual fund investments.
A mutual fund is a smart investment option that is easy to understand, convenient and offers you various amazing benefits. With professional management advantage, you can start investing systematically in mutual funds. You can choose the investment option, fund type that is suitable based on your risk appetite and investment objective.
As an investor, you look for various investment assets like equities, bonds, real estate and others to invest in. There are various investment options available in the market that can suit varying risk-return requirements.
Mutual fund is one such investment option that fits into every investor’s needs. With more than 2,500 mutual fund schemes available in India, mutual funds as an investment vehicle has become popular over the past few decades.
What are mutual funds?
Mutual fund is an investment avenue that pools money from investors with a common objective and invests the pooled money into various asset classes like stocks, bonds and other assets based on the objective of the scheme.
Fundamentally, a mutual fund is a trust consisting of investors with similar objectives and the pool of money by them is invested and managed by Asset Management Companies (AMC).
Asset Management Company employs professional fund managers for managing each mutual fund scheme using their expertise. The Asset Management Companies are approved and regulated by Securities and Exchange Board of India (SEBI).
Mutual fund trust includes sponsor, trustees, custodian and asset management company (AMC). Here is a basic structure of mutual funds in India –
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How mutual funds work?
When you consider investing in mutual funds, it is important to know how it works. You first need to understand a few important terminologies that can help you understand the concept of mutual funds thoroughly.
Mutual fund unit: Mutual fund unit denotes extent of your ownership in that particular fund just like an equity share that represents your extent of ownership in the company.
Net Asset Value (NAV): Net asset value or NAV is the fund’s per unit price. NAV is calculated on a daily basis at the end of market hours as the value of underlying securities in mutual fund investments change every day. Basically, NAV is calculated by dividing the total net asset value (asset – liabilities) by the number of units outstanding.
Assets under Management (AUM): Assets under management (AUM) is the total investment value or market value of assets that a mutual fund holds.
Fund Portfolio: Fund portfolio is collection of investments held by a mutual fund which is invested in different asset classes by the fund manager.
Fund Manager: Fund manager is a professional appointed by the asset management company for implementing investment strategy and taking decisions to buy and sell securities using the market expertise.
Working of mutual funds is quite simple. Here is a simple step-by-step guide that can help you understand the concept or working of mutual funds.
Like minded investors like you invest in a mutual fund scheme by pooling money.
Mutual fund trust that collects the money allots you fund units based on the amount of investment you make. Price of each unit is referred to as net asset value (NAV).
Fund managers appointed by the Asset Management Company (AMC) take the decision of investing money in various securities like stocks, bonds, money market instruments and other asset classes depending on the investment objective. Fund manager also decides on the allocation of the fund portfolio.
Depending on the capital market performance, buying and selling decisions of fund managers, investments made in securities will generate profit or income.
Returns earned from the investments into securities are passed back to the investors.
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The following chart explains the concept of mutual funds in the simplest way.
You can also understand the concept of mutual funds easily with an example below.
Let’s say SBI Mutual Fund launches a new equity-oriented mutual fund scheme. Let’s say a fund collects INR 10 crores from 1000 investors assuming each investor invests INR. 1 lakh. In the next step, Asset Management Company allocates units. Let’s assume, the company issues units at the net asset value of INR 10.
That means, if you have invested INR. 1 lakh in the fund, you would get 10,000 units. Total of 1Cr units will be allocated to all the investors. Fund managers will now invest INR 10 crores into various stocks, say about 10 stocks which form the portfolio of the fund. Fund managers will also maintain some liquid cash to deal with redemptions.
Let’s say after a few days the portfolio of stocks grows to INR 11 crore, assuming that there is no change in the portfolio and number of investors. That means, the net asset value of the fund is now INR 11 (INR 11 cr/1 cr). If you redeem, you would get INR 1.1 lakh, which means INR 10,000 would be your gain.
This is just an illustration for easy understanding of the concept; in actual scenarios there may be buying and selling on a daily basis. Understanding the investment and its concept can help you make informed and rational investment decisions.