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| Mutual Funds |
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A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together people and invests their money in stocks, bonds and other securities. Each investor owns units, which represents a portion of the holdings of the fund.
A mutual fund gives you an option to either receive your earnings in the form of dividend, or to let the same accumulate in the fund through the growth option. In that case, the unit price called NAV increases, and you may redeem the profit by selling of a part or all of your unit holdings.
Mutual Fund is a vehicle that enables a collective group of individuals to: - Pool their investible surplus funds and collectively invest in instruments / assets for a common investment objective.
- Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
- Benefit from the economies of scale which size enables and is not available on an individual basis
Mutual fund gains are included in capital gains and are taxable as per current capital gains laws. These however, keep changing from time to time, hence it is advisable to contact our tax experts who will be able to guide you in your entire tax planning.
Mutual Fund terms that you may want to know
Net Asset Value (NAV)
NAV is the sum total of all the assets of the mutual fund (at market price) less the liabilities (fund manager fees, audit fees, registration fees among others); divide this by the number of units and you get the NAV per unit of the mutual fund.
Standard Deviation (SD)
SD is the measure of risk taken by, or volatility borne by, the mutual fund. Mathematically speaking, SD tells us how much the values have deviated from the mean (average) of the values. SD measures by how much the investor could diverge from the average return either upwards or downwards. It highlights the element of risk associated with the fund.
Sharpe Ratio (SR)
SR is a measure developed to calculate risk-adjusted returns. It measures how much return you can expect over and above a certain risk-free rate (for example, the bank deposit rate), for every unit of risk (i.e. Standard Deviation) of the scheme. Statistically, the Sharpe Ratio is the difference between the annualised return (Ri) and the risk-free return (Rf) divided by the Standard Deviation (SD) during the specified period. Sharpe Ratio = (Ri-Rf)/SD. Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.
Compounded Annual Growth Rate (CAGR)
CAGR can be defined as the year-over-year growth rate of an investment over a specified period of time.
CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.
Absolute Returns
These are the simple returns, i.e. the returns that an asset achieves, from the day of its purchase to the day of its sale, regardless of how much time has elapsed in between. This measure looks at the appreciation or depreciation that an asset - usually a stock or a mutual fund - achieves over the given period of time. Mathematically it is calculated as under:
Generally returns for a period less than 1 year are expressed in an absolute form. |
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