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How does my investment grow in a mutual fund?

Mutual Fund Investment Growth

Many people invest in mutual funds without the clarity on how to calculate the returns. When you park your money in a savings account or in a fixed/recurring deposit, you earn monthly or quarterly interests, but mutual funds don't offer any interests on your investments - then how does the investment grow?

When you make a mutual fund investment, you actually purchase certain units of that mutual fund. The value of the units is the NAV or Net Asset Value of the fund. The dictionary meaning of NAV says "The net assets of an entity minus the liabilities".


The mutual funds invest in equities or debt instruments like corporate/government bonds. The total asset value of a fund includes cash, stocks or bonds at current market rate.  The market value is the closing price of the stocks on which these are listed. Dividend & interest income is also included as part of the asset.

How is NAV calculated?


NAV = (Assets - Debts)/Total Units

The NAV of the fund is updated daily on a trading day. Usually all investments in a fund till 2PM daily are allocated on the same day's NAV, but this differs across funds and across distributors through which the investment is made. So please ensure you check this before making a huge lump-sum investment in a fund. For those investing through SIP can breathe easy because over a period of time your investments can average out.

What makes a mutual fund more interesting is you can buy in really small quantities & fractions unlike a stock where you cannot buy a fraction. Let's say the NAV of a fund is 30.00 and you decide to invest 1000 INR - you will be allocated 1000/30=33.33 units of a fund. And when you would want to redeem the investments, you actually sell these units of a mutual fund.

Since a fund manager allocates investors money into specific equities or debt instruments - as an investor we need to give time to our funds to create wealth. No one can predict market up or downside in near term, but a fund manager allocates the funds in fundamentally strong companies or the companies in which there is a clear vision of growth & therefore in a longer term horizon the stock prices have to rise & so is the mutual fund's NAV.

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com

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