Mutual Funds Demystified: NAV, SIP, and Returns

What is a Mutual Fund?

A mutual fund pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities, managed by a professional fund manager.

Net Asset Value (NAV)

Formula: NAV = (Total Assets − Liabilities) ÷ Units Outstanding

NAV is the per-unit value of the fund, calculated at the end of each trading day. When you invest ₹10,000 in a fund with NAV ₹100, you receive 100 units.

• NAV changes daily based on portfolio value.
• A low NAV does NOT mean the fund is "cheap" — it just reflects the fund's age and dividend distributions.

Types of Mutual Funds

• Equity: Invest primarily in stocks (Large Cap, Mid Cap, Small Cap, Flexi Cap, ELSS)
• Debt: Invest in bonds and fixed-income instruments
• Hybrid: Mix of equity and debt
• Index Funds & ETFs: Passively track an index like Nifty 50 (lowest cost)

SIP (Systematic Investment Plan)

Invest a fixed amount monthly (e.g., ₹5,000). Benefits:

• Rupee cost averaging: Buy more units when prices fall, fewer when they rise.
• Discipline: Removes emotion from investing.
• Compounding: Small amounts grow substantially over 10-20 years.

Key Metrics to Evaluate

• Expense Ratio: Lower is better (0.2% for index funds, 1-2% for active equity funds).
• 1Y / 3Y / 5Y Returns: Compare against benchmark and peers.
• AUM (Assets Under Management): Very large AUM can constrain small-cap fund performance.
• Fund Manager Track Record: Look at long-term consistency.
• Standard Deviation & Sharpe Ratio: Risk-adjusted returns.

Taxation (India)

• Equity Funds: LTCG (>1yr) taxed at 10% above ₹1 lakh gain. STCG (<1yr) at 15%.
• Debt Funds: Gains taxed at slab rate (post April 2023).
• ELSS: Eligible for ₹1.5 lakh 80C deduction; 3-year lock-in.