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What is an Equity Diversified Mutual Fund and How to Calculate its NAV?



Why do you invest in a financial instrument such as an equity diversified mutual fund? Isn’t it for those high returns promised by these funds? Since these funds are known to give high returns shouldn’t we study about these equity diversified mutual funds? Haven’t we heard the phrase "Do Not Put All Your Eggs In One Basket"…Because if the basket falls we all know what happens .Equity diversified mutual funds help us to avoid such kind of risks. In order to understand all about mutual funds we need to look up the website Moneymindz.com.

So What Is An Equity Diversified Mutual Fund

Here a mutual fund looks to invest in a wide variety of companies. These may be small to medium sized companies and may range up to large capitalized companies. These companies may be spread across sectors and industries. These may be into oil and gas, pharmaceuticals or infrastructure. Before tapping into these kinds of mutual funds we need to weigh our risk potential. This kind of fund is very useful for those investors who are willing to take higher risk in exchange for a higher return. A risk averse investor may see his corpus of investments eroded in a bearish market and this kind of investment is not suitable for him.

Entry And Exit Loads Associated With Equity Diversified Mutual Funds

Here Equity Diversified Mutual funds had an entry load of 2.25% which was removed in August 2009. So whom does this benefit? Of Course Us The aim of this was to bring in transparency in the mutual fund sector particularly in the commissions paid out to the Distributors of mutual funds. This issue was recently discussed in parliament where it was felt that the entry load should be reintroduced as this was affecting the livelihood of Lakhs of Distributors, and also investors with no one to persuade them to invest in mutual funds were turning to Gold as an investment avenue We import Gold in large quantities being lovers of Gold and the highest Bullion Purchasers in the world. We imported about 38 Billion Dollars worth of Gold in a single quarter from 1st January 2013 To 31st March 2013.This has led to record high Current Account Deficits. Here funds charge an exit load of 3% if funds are redeemed within 6 months of allotment or at 2% if funds are redeemed within 2 years of the date of allotment.This was applicable from October 2012.

What are the types of Equity Diversified Mutual funds?

  • Open ended funds do not have a fixed maturity period. Investors can redeem these funds on a daily basis. Here investors can enter and exit these funds as per their convenience. These funds have a high liquidity. Here the units are bought and sold at the Net Asset value declared by the fund. However this type of fund has its disadvantages.
  • Fund managers have to be prepared for redemptions at all times. An investor can redeem his units at any time and the fund manager has no control over this. Doesn’t this make his job very difficult? He has to maintain liquidity all the time with large proportions of investments kept in money market investments.
  • Closed-End Funds: This is a kind of a mutual fund that trades on an exchange like a company stock. Here we have the word closed end which means that these funds do not continuously issue new units like the open ended variety. They have a lock in period which might range from 3-5 Years .Here when we have a bull run these closed–end funds are the in thing and they rise above the net asset value. When there is panic selling or a bear market these are redeemed at prices less than the net asset value. Generally these should be bought at a discount to the net asset value.
  • So How Do Closed-End Mutual Funds Make A Profit: These funds borrow heavily at short term interest rates and invest for long terms to profit in the share market. The fund manager has a measure of freedom as he does not have to worry about fund withdrawals. Many of these funds pay huge amount of dividends making them popular among older investors. Here in these funds you need to take into account not only the NAV but also the discount or premium at which the fund is trading.

What Is The Annualized Return Of An Equity Diversified Mutual Fund

Here we have an Equity Diversified Mutual Fund. This is a Closed–End fund. Here we have the" NAV" of the Equity Diversified Mutual Fund which is "12" (NAV=’12’) in the year 2009. Here we have (NAV=’22’) in the year 2012. Here let us consider NAV= ‘12’ as "A" and NAV = "22" as "B".

CAGR = ((B) / (A)) 1/n – 1.00 where n=3 (No of years). CAGR = ((22) / (12)) 1/3 – 1.00=1.22 -1.00 =0.22. This gives us an Annualized Return of 22%.

This is basically the average rate of return earned by the investment each year over a given time period

So What Is This Net Asset Value Of A Mutual Fund All Of Us Talk About

  • Here we have the total market value of all the assets of the mutual fund portfolio such as Cash, Securities, Shares, Bonds, Liquid Assets, Dividends to be received and interest accrued. We have the liabilities which are the some ’s of money owed to its creditors. There will be certain expenses accrued over time yet to be paid.
  • Net Asset Value is basically the difference between these assets and liabilities divided by the outstanding units. The outstanding units are those which are taken up by the investor.
  • Let us take a simple example to understand this. "A" invests INR 1000000 in an Equity Diversified Mutual Fund and "B" invests INR 4000000 and "C" invests INR 7000000.Here this fund issues units at INR 1/- Each investor gets units as per the corresponding amounts he invests in the requisite proportion. Here the total corpus is the sum of A, B and C which translates to INR 1.2 Crores. The manager through careful investing for a long period of time in the market raises the sum to 4 Crores.We also have to consider the expense ratio.Expense ratio is basically the operating expenses of a mutual fund divided by the value of the assets under management. Here we have 4 Crores. Here we divide 4 Crores by 1.2 Crores.The NAV is equal to 3.33. In reality this is a much higher value as Crores of rupees are invested and expense ratio and debt/liabilities are much higher. Here we also have to deduct Expense ratio from the NAV.
  • Here the NAV is calculated by the mutual fund house itself and in some cases by the accounting firms hired for this purpose by the mutual fund house.
  • It is very difficult to calculate the NAV during market hours and these are usually declared after market hours once a day. This is because the value of the underlying assets continuously changes during market hours.
  • Here mutual fund houses publish the NAV of their schemes at least once a week in atleast 2 leading dailies

Benchmarking Of An Equity Diversified Mutual Fund

Here a fund marks or targets a particular index such as the Sensex. Here when the NAV of the Equity Diversified Mutual Fund rises by 9% the Sensex has risen by 7% over a 2 Month time frame. Here the Equity Diversified Mutual Fund has beaten its Benchmark which is the Sensex. Don’t we all compare our individual performances with each other and the topper? This is similar to benchmarking

Points To Remember While Benchmarking Of Equity Diversified Mutual Funds

  • We cannot compare the performance of an Equity Diversified Mutual fund whose bulk of corpus is in large capitalization Companies with those which are in Medium Capitalization Companies. Similar Companies have to be compared or those which are in the same category.
  • Comparisons should have similar time frames. Here we compare an Equity Diversified Mutual fund which has a time horizon of 3-5 Years with an Equity Diversified Mutual Fund with a similar time horizon.
  • Here we have an Equity Diversified Mutual Fund which has benchmarked itself against the Sensex. The Regulations demand that each and every fund benchmark itself against an Index .Here we compare the funds performance against a benchmark index. Here generally in periods of great volatility and when the market is underperforming, the equity diversified mutual fund trails the benchmark index. However if an Equity Diversified Mutual Fund over performs its comparison index then it needs to be monitored closely.
  • Compare the historical data and performance of the Equity Diversified Mutual Fund. While this might not give an exact idea of the current and future performance of the fund it might give us a general idea of the performance of the Equity Diversified fund.
Mutual Funds
Mutual Funds