Net Asset Value in Mutual Funds Fair Division of Profits and Investor Returns

  1. Importance of Personal Finance
    1. Personal finance: Why Is It Important?
    2. what is personal finance explained with example
    3. Compound Interest and Simple Interest Understanding Personal Finance Maths
    4. compounding effect Understanding Compounded Returns with Formulas and Examples
    5. value of money Exploring the Concept of Present and Future Value in Personal Finance
    6. Future Value of money Formula How to Calculate with Example
    7. Retirement Tips for How to Save, Plan, and Invest
    8. Inflation how it Impacts Your Retirement Income with formula and examples
    9. Diversifying Portfolio for a Secure Retirement example of Investing in Multiple Assets
    10. Retirement Corpus example Strategies and Assumptions for a Secure Future
    11. mutual funds introduction
    12. Asset Management Companies:Understanding Structure and Roles in Mutual Funds
    13. NAV Net Asset Value Understanding the Core Concept of Mutual Funds with example
    14. Net Asset Value in Mutual Funds Fair Division of Profits and Investor Returns
    15. Mutual Fund Fact Sheet A Comprehensive Guide Unlocking the Secrets of MF Factsheets
    16. types of mutual funds schemes as per SEBI October 2017 Circular
    17. MultiCap Funds
    18. Focused Funds
    19. Dividend yield funds
    20. ELSS Funds
    21. debt fund A Comprehensive Guide to Understanding What are Debt Funds in india
    22. liquid mutual fund
    23. Overnight Fund all you need to know about Overnight debt funds
    24. liquidity risk in mutual funds
    25. Banking and PSU Debt Fund
    26. Credit Risk Funds
    27. GILT Funds
    28. Bond Financial Meaning With Examples and 5 types of bonds explained
    29. YTM Yield to Maturity definition and how to calculate
    30. Accrued Interest Definition and Example how to calculate
    31. Active vs Passive Investing for Better Return
    32. What Are Arbitrage Funds? · ‎Example of Arbitrage Fund
    33. mutual fund terms top 10 jargons to know before investing
    34. CAGR how to calcullate Compound Annual Growth Rate with formula
    35. Rolling Return Analyzing Mutual Fund Performance Over Time
    36. Expense Ratio What Is this fee And Why Does It Matter with examples
    37. Direct vs Regular Mutual Fund
    38. Benchmark in Mutual What It Is, Types, and How to Use Them
    39. Mutual Fund Risk Exploring Beta, Alpha, and Standard Deviation
    40. sortino ratio and Capture Ratios uses in Evaluating Mutual Fund Performance and Risk
    41. Mutual Fund Portfolio Guide for Financial success
    42. How to choose the best Mutual Fund for Your Portfolio by Evaluating Risk and Objectives
    43. Mutual Fund for beginners cheat sheet for Financial Success
    44. Smart Beta etf Exploring the Factors that Drive Return
    45. Asset Allocation and Diversification to Build a Balanced Portfolio
    46. Investment Vehicles Exploring the Evolution From Mutual Funds to ETFs
    47. GDP to Market Cap Ratio: Exploring the Link between Macroeconomics and Investments
    48. personal finance guide for Long-Term Success by Taking Control of Your Finances
    49. Personal finance Guide to Optimizing Your Investments and Achieving Your Financial Goals
Marketopedia / Importance of Personal Finance / Net Asset Value in Mutual Funds Fair Division of Profits and Investor Returns

It is the responsibility of a fund manager to invest the funds in an appropriate manner, selecting stocks and determining how long to hold them and when to sell them. This is done while upholding fairness among all investors so that they all get the most profitable returns.

 

You need to combine all people’s money and invest it as one unit, known as a fund. This should mean that all investors will experience the same returns.

 

Considering this, how do we guarantee a fair division of profits among all the customers?

 

We can begin by offering shares in exchange for the investment from each investor and assigning a corresponding value to them.

 

You can assign any initial value – 5, 10, 50 or even 100 – it doesn’t matter; the most common choice, however, is Rs.10, and that is what we will go with.

 

We issue shares with a notional value of Rs.10/- to all our investors, with the amount of shares held estimated according to how much they have invested. As an example, someone who has put in Rs. 65,000 would get…

 

= 65,000/10

 

= 6500 shares.

 

The table now looks like this –

 

27,500 shares were distributed among the five investors, each with a notional value of 10. This corresponds to a total corpus of Rs.275,000/-.

 

Now that the fund has been set up and shares assigned to investors, the fund manager can get down to what he does best – selecting stocks and investing funds.

 

In your role as a fund manager, it is your call to invest the funds, i.e. Rs.275,000/- across ten stocks in an evenly distributed portfolio. In doing so, you have chosen to divide the amount equally among all the stocks.

 

The corpus amounts to Rs.275,000/-, with each stock receiving an investment of Rs.27,500/-.

 

The allocation of funds to the ten stocks is as follows –

 

It is evident that Rs.27,500/- has been allocated across ten distinct stocks with various values.

 

Two things are now in place at this stage:

 

– Shares are distributed among investors according to the amount they each invested, with each receiving an appropriate number of shares.

 

– The funds are placed into the markets through investments in ten different stocks.

 

Once investments have been made in the market, the value of the entire fund relies on the daily performance of each share. Certain stocks may increase while others may decrease, resulting in a gain or a loss that must be shared by all investors. The amount each investor is affected by their initial input into the fund.

 

Let us carry on with the example to understand how the P&L passes through. I have randomly assigned each of these stocks a percentage change.

 

As can be observed, the stock prices on day 2 have fluctuated, causing a corresponding change in invested value across each share. This variation has resulted in a portfolio value of Rs.277,844 and a one day return of Rs.2,844/- or 1.0340%.

 

The profit of Rs.2,844/- must be divided among the five investors according to the amount they put in. To guarantee fairness, we need to make certain that their notional value rise (or falls) by the same proportion as the fund – 1.0340% for this situation.

 

The initial notional value on day one was 10.

 

P&L % in funds – 1.0340%

 

New notional value (day 2) – 10 *(1+1.0340%) = 10.1034

 

Hence, multiplying the number of shares by the new notional value of 10.1034 should give the investor their new investment value.

 

As is evident, the percentage of increase for all investors has been the same, but the absolute amount gained by each depends on their initial investment.

    captcha