A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Should the high or low NAV of a scheme influence your investment decision?
When you order a ‘
big’ pizza compared to a ‘normal’ one, do you find any difference in the taste of the two? Of course not! Both are prepared using the same recipe and the same process. They differ only in size and price. You get the same taste as a Farmhouse Pizza regardless of the size you order from the menu.
Mutual funds also offer a bit of the same taste as pizza. When you buy a fund, you pay its price, i.e. NAV to own one unit of the fund. A large fund with more investors putting their money into it will have a large asset base and therefore a higher NAV. But the same fund may have had a much lower NAV when it was launched because a fund’s NAV increases over time as the fund gets bigger with more investors coming together. But does this mean that the recipe of the fund has changed or the process of realization?
The allocation to different asset classes and types of securities and the process of managing the fund remain the same if the investment objective of the fund has not changed. So your return experience will remain unaffected regardless of the NAV of a fund, just like the taste of a slice of your Farmhouse Pizza regardless of its size.