A mutual fund statement can make investing look surprisingly neat. There is an amount invested, a number of units, an NAV and, eventually, a gain or loss. Behind those few numbers, however, quite a lot is happening.
The money does not simply sit with the fund waiting to earn a fixed rate of interest. A mutual fund pools money from investors and invests it in securities according to the scheme’s stated objective. Depending on the scheme, the portfolio could contain shares, bonds, money-market instruments or a combination of assets. SEBI explains that mutual funds are professionally managed and that the value of each unit, or Net Asset Value (NAV), is disclosed daily.
Understanding that journey makes mutual fund returns much easier to put into perspective.
What happens after an investment is made?
When an investor makes a mutual fund investment, units of the chosen scheme are allotted at the applicable NAV. The NAV represents the per-unit value of the scheme’s net assets.
From there, the value of the investment changes as the value of the underlying portfolio changes. An equity fund, for example, is affected by movements in the shares it owns. A debt fund can be influenced by factors such as interest-rate movements and the credit profile of the securities in its portfolio.
This also explains why a mutual fund does not come with one standard rate of return. Two schemes can behave very differently because they may own different assets and follow different investment strategies.
Where does the return actually come from?
Suppose an investor puts ₹20,000 into a scheme at an NAV of ₹20 and receives 1,000 units. If the NAV later reaches ₹22, those 1,000 units would be worth ₹22,000. If it falls to ₹18, their value would be ₹18,000.
The example is deliberately simple, but it illustrates an important point: a return is the outcome of what happens to the investment, not a rate decided in advance.
Over a longer period, that outcome can reflect several things. Equity portfolios may benefit when the companies they hold grow in value. Debt securities can generate interest income while their market values may also change. Scheme expenses matter too. Under SEBI’s mutual fund framework, expenses charged to a scheme affect the NAV and consequently, the return that reaches the investor.
The period over which performance is measured matters as well. A return over one year captures only that particular stretch of the market. A longer record can show how the investment behaved through different conditions, although past performance cannot determine what happens next.
The route into the fund can matter too
Not every investor puts in the entire intended amount on one day. Some invest periodically through a Systematic Investment Plan.
An SIP changes when and at what NAV different investments are made; it does not change what the underlying mutual fund owns. AMFI describes an SIP as a methodology through which a fixed amount can be invested in a mutual fund scheme at regular intervals.
Because NAVs fluctuate, the same SIP amount can purchase different numbers of units at different times. When the NAV is lower, it buys more units; when the NAV is higher, fewer. This is commonly called rupee-cost averaging. Importantly, AMFI also notes that rupee-cost averaging neither assures a profit nor protects an investor against losses in a declining market.
Estimating an SIP before investing
Returns cannot be known in advance, but an investor can still work backwards from a financial target.
This is where an SIP calculator can be useful. Instead of predicting what a scheme will deliver, a calculator allows different assumptions to be tested. An investor can change the monthly investment, assumed rate of return or investment period and see how the estimated corpus changes.
For instance, extending the investment period can show how the same monthly contribution behaves over a longer assumed compounding period. Increasing the monthly amount shows the effect of contributing more capital.
The distinction between an estimate and an expected outcome is important. The SIP Calculator explicitly states that its results use an assumed rate of return and should not be construed as a promise of minimum returns or protection of capital.
Reading returns in context
A return figure becomes more useful when the investor knows what produced it. The scheme’s investment objective and portfolio show where the money is invested, while its benchmark provides context for performance. The Riskometer offers another piece of the picture by indicating the level of risk associated with the scheme; SEBI requires mutual fund schemes to display it. Taken together, these details tell a fuller story than a return percentage on its own.
Mutual fund investing therefore involves two separate questions: what an investor hopes to achieve and what the chosen scheme actually does with the money. Understanding the connection between the two can make NAV movements, returns and calculator estimates far less abstract and make a mutual fund statement considerably easier to read.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Note to the Reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint. The content may be for information and awareness purposes and does not constitute any financial advice.
This is an investor education and awareness initiative. All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under ‘Intermediaries/ Market Infrastructure Institutions’. For redressal of your complaints, you may please visit SEBI SCORES. This is an investor education and awareness initiative by Nippon India Mutual Fund.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
