The total market value of the portfolio is known as the Net Asset Value (NAV) of the mutual fund. As the market value of the underlying securities that make up the mutual funds’ investment changes every day, so does the NAV of the mutual fund. The NAV per unit or the price of the mutual fund share is arrived at by dividing the total NAV by the number of outstanding shares of the scheme. The number of outstanding shares is nothing but the total number of units on any given day.
For example, if the market value of the portfolio of a mutual fund’s investment is ₹300 lakh and the mutual fund has issued a total of 20 lakh units of ₹10 each to the unitholders, then the NAV per unit of the fund is ₹15 (i.e.300 lakh/20 lakh).
SEBI mandates that NAV be disclosed by the mutual funds on a daily basis. The NAV per unit of all mutual fund schemes must be updated on the Association of Mutual Funds of India (AMFI) website and the Mutual Funds’ website by 9 pm on the same day. For a Fund of Funds, the deadline is extended till 10 am of the following business day.
The actual price of the unit may include an entry or exit fee called entry load or exit load. The load charged as a percentage of the NAV and the structure must be disclosed in the offer document of the mutual fund. Mutual funds that charge a load are called Load Funds.
Suppose the NAV per unit of a mutual fund is ₹20. If the entry and the exit load charged is 1%, then the investors who buy would pay ₹20.20 (20 + 1% of 20) per unit and those who offer their units for repurchase to the mutual fund will get only INR 19.80 (20 – 1% of 20) per unit. SEBI requires that any exit load charged is credited to the mutual fund scheme itself. Further, SEBI regulations state that no entry load is charged on any mutual fund scheme in India.
When you compare mutual funds to invest in, you must consider the loads as they impact the mutual fund investment returns. That said, the performance track record and service standards of the mutual fund are much more important factors. You should also remember to rebalance your portfolio periodically based on your risk appetite and the performance of individual schemes.
A no-load fund is one that does not charge for entry or exit. An investor can enter or exit such a fund/scheme at the NAV and no additional charges are applied on purchase or sale of units.
While a mutual fund is allowed to change its exit load, the change is only applicable to prospective investors. That is, you cannot be charged any exit load beyond what was specified in the offer document at the time of your purchase. Any fresh loads or increase in exit load can be applied only after the offer document is modified to reflect the same. As no entry load is allowed in the Indian market, the same cannot be modified at any point during a mutual fund’s lifetime.
The price or NAV a unitholder pays when investing in a mutual fund scheme is also known as its sales price. Repurchase or redemption price is the price or NAV at which a mutual fund scheme purchases or redeems its units from the unitholders. This price includes the exit load, wherever applicable.
Now, let us discuss the various types of mutual funds to invest in.