The Family pot
Hopefully, the preceding chapter aided you in apprehending the structure of a Mutual Fund company. While not imperative, having an idea of the Mutual fund structure could prove useful at some point during your investing voyage.
Going forward, we can focus on developing an understanding of Mutual funds. We will gain insights into various fund classes, investigate fund characteristics, explore fund options, as well as many other aspects related to investing in mutual funds. But first, let’s grasp the central concept. Based on my observations, many people are confused when the term ‘funds’ is mentioned when talking about a mutual fund.
Before we move further into our study of mutual funds, we need to be clear on the definition of ‘fund’.
So let us begin, and to help illustrate the topic, we will construct a hypothetical tale.
Think of yourself as the stock market mastermind amongst your family and friends. You’ve seen success with your investments; you’ve scored a few multi-baggers, correctly predicted the highs and lows, and even got a selfie with Rakesh Junjunwala at an event!
Your stock market ventures have created quite a stir in your family, with you attaining the spotlight in the family WhatsApp group.
Your uncles, aunts and cousins have come to you with the expectation that you can help them manage their funds. You are elated with this newly appointed “quasi fund manager” title you’ve earned.
What are the methods of managing this money?
Strict compliance with regulations means that unless you possess a PMS licence, as already mentioned in the last chapter, you are not allowed to manage money belonging to other people.
Once you have applied for and obtained a fund management licence from SEBI, you are ready to go.
You are now ready to provide your money management services to your family as well as, hopefully soon, many other people.
Your family members are delighted by your fund management abilities, and looking forward to enjoying the advantages they will bring. Here are the details:
You have managed to collect Rs.275,000/- from five individual investors, each of whom invested a different amount of money.
Before beginning, a few expectations should be established.
– Investors should be provided with equitable returns.
– You may extend different levels of service to these people. For example, the aunt has put down the largest amount, so you can make her feel special by giving her coffee and cookies when she visits. In contrast, since the nephew has invested the least, you can decide against giving him coffee or cookies.
Let us take some extra time to really make sure these two points are secured.
Envision the two of us entering a restaurant, you would be a familiar face, having visited the establishment frequently and provided them with plenty of business. For me, however, it would be my first trip.
We both end up ordering a portion of biryani and will likely receive the same quality and quantity. As a regular patron, you may have the privilege of being served with fine silver cutlery, with the owner possibly taking time to chat about your well-being. Whereas I would most likely just be seen as a regular customer and given ordinary utensils.
We both have the same meal, so no discrepancies there.
As a fund manager, you can use the amount invested by each customer as a basis for differentiation. However, you should never create unequal returns based on this data. All customers should receive the same returns.
Mutual funds can be further broken down into different investment objectives, mandates, and other factors. We’ll delve deeper into this in the upcoming chapter.
Having put the expectations in place, now it’s simply a matter of making the logistical arrangements for how this money will be handled.
You can now request your family to deposit all the funds in one account to simplify management. By pooling the money into this account, you’ll be able to invest in the market.
This is why they refer to ‘Mutual Funds’ as such – because all the money is pooled into one account, belonging to everyone. This rationale explains why it’s called a ‘Mutual Fund’.
By summing all the contributions, you will get a grand total of Rs.277,844/-, which is the new fund value.
Before finishing this chapter, I urge you to keep in mind these points as they relate to mutual funds.
– When people combine their resources, they create an investment fund.
– All investors are pursuing the same objective in their investments.
– A Notional Value is allocated when a fund is set up, which then changes based on the daily investment worth. This concept is known as ‘Net Asset Value’ in the Mutual fund domain.
The net asset value is a key component of a mutual fund, and it is worked out on a daily basis. The calculations are done by the mutual fund organisation at the close of business each day.
– The worth of all investments is considerable.
– Expenses of running the mutual fund
NAV of a fund is estimated daily based on these 2 parameters:
NAV = (Value of all the assets – the expenses)/number of shares (units)