Mutual fund returns

[mf_investor_me]

Hi,
I am new to the stock market and mutual funds. I have read a lot of articles and have convinced myself that Mutual fund is the best option for a beginner like me. I want to invest in MF mainly for tax saving (ELSS) and also get some profit (if lucky. I know that the lock-in is 3 years. My question is when they say that an MF has 27% growth then what is the profit that I get if I invest Rs.1000 every month thru SIP. What amount will I get after 3 years and how?

Thanks

 

[ranj_2k]

Dear MF Investor,
It is advisable for beginners to enter stock market through SIP. If you invest lumpsum Rs.10,000 and if growth is 27% p.a. then you will earn Rs.8100 after three years after deducting applicable entry / exit load. Through, SIP method also in long run you will earn more or less same return. You can refer valueresearchonline.com for choosing right MF.

 

[mf_investor_me]

Thanks for the reply.

Some more questions:
1. How did you calculate the amount of Rs. 8100?
2. What is the role of NAV and what is its relation with the growth figure of 27%?
3. I will get the above amount on closing the MF account after 3 years like we do in bank deposit or I will have to sell teh MF units to someone?

 

[santoshkmhatre]

I suggest,dont take SIP route for ELSS schemes.
Let me explain,if you start a SIP of say 1000 per month in Jan 2007.Now,ELSS schemes have lock-in of 3 years.Hence,in Dec 2010,you can only redeem units equivalent to 1000 invested in Jan 2007 and likewise for subsequent months.
My personal opinion is that SIP is best route for doing MF investments for log term basis.For ELSS,do some research and time your investment through lumpsum only.
Visit valueresearchonline.com,moneycontrol.com for more info.

Regards,
Santosh Mhatre

 

[yoogi]

1. I dont know how he calculated it. But usually entry load is 2.25% and exit load after 3 years is 0%. this may differ from fund to fund but almost 90% of "Equity diversified funds" uses this entry and exit loads.

So when you invest 10,000 only 9775 is invested (deduct 2.25%)
and 27% pa translates to 104.8% in 3 years which should result in about 20,023 rs, a profit of about 10,023 rs.

Probably ranj_2k is having a diffrent calculation method.

2. NAV stands for Net Asset Value (per unit). You are actually alloted Mutual fund units only. If NAV is 10 rs, and you invest 10,000 (only 9775 is invested.) you will get about 977.5 units only. NAV changes daily for a fund that is open. (new funds will become open after few days of its functioning..).

People can buy more units if they want, by paying the current NAV + applicable entry load. People can sell their units and recieve money based on Current NAV - Applicable exit load.

NAV is not relavant to growth. NAV 10 rs does not mean the fund is cheap or NAV 100 rs does not mean it is costly.

Let us say you bought NAV at 10 rs. If the fund gains 27% pa, the NAV would have gained 104.8% and become 20.48

3. The mutual fund comapny (called AMC-meaning Asset management company) will buy back whatever units you want to sell. So whenver you want to encash the MF units you fill a form of withdrawal and send it to MF company. They will either send you a cheque or directly credit your bank.

You dont have to close everything. You can sell a part. If you have 977.5 units and NAV is 20.4 rs now, then you can sell about 490units and get about 10,000 rs. You will still have about 487.5 worth another 10,000 + .

 

[mf_investor_me]

Thanks for the reply.
However I have read at many places that NAV is irrelevant, but the profit I get is PURELY based on NAV. So why do they say to ignore NAV and look at performance of a MF?
Also, how did you calculate 27% p.a to 104.8% profit in NAV?

 

[yoogi]

Profit per unit = NAV at the time of exit - NAV at the time of entry .

Let us say 2 similar funds with similar returns. (27% p.a)

Fund A has NAV 10 rs . Fund B has NAV 20rs

A) you will get 1000 units for 10K
B) you will get 500 units for 10K

Now if NAV at the time of exit (after 1 years) is going to be 27% more,

A) 10 rs NAV would become 12.7
B) 20 rs NAV would become 25.4.




A) profit per unit is 2.7 and your profit is 1000 x 2.7
B) profit per unit is 5.4 and your profit is 500 x 5.4

See, profit are same. So performance matters, not NAV

 

[mf_investor_me]

Ok, I understand the catch now. Higher NAV with higher performance will be ideal.

One more thing I would like to know is that, what is the best method to invest in MF....online like ICICI direct, Sharekhan or directly with AMC?
I checked on ICICI direct, they don't have SBI MF in their list.

I am thinking on investing in SBI Magnum Tax gain, Reliance Tax saver and Principal Personal Tax saver.

 

[mf_investor_me]

I suggest,dont take SIP route for ELSS schemes.
Let me explain,if you start a SIP of say 1000 per month in Jan 2007.Now,ELSS schemes have lock-in of 3 years.Hence,in Dec 2010,you can only redeem units equivalent to 1000 invested in Jan 2007 and likewise for subsequent months.
My personal opinion is that SIP is best route for doing MF investments for log term basis.For ELSS,do some research and time your investment through lumpsum only.
Visit valueresearchonline.com,moneycontrol.com for more info.

Regards,
Santosh Mhatre

Hello Santosh,
I did not get you. As far as SIP is concerned, it is a safe route for the present volatile market as I can get more units when NAV is low and of course lesser units when NAV is high during the 3 year investment period. Also I can invest in small amounts and control the risk, instead investing a huge amount and loosing it in case the markets go down.

 

[mf_investor_me]

Hello Santosh,
I did not get you. As far as SIP is concerned, it is a safe route for the present volatile market as I can get more units when NAV is low and of course lesser units when NAV is high during the 3 year investment period. Also I can invest in small amounts and control the risk, instead investing a huge amount and loosing it in case the markets go down.