Concept of Fund & Net Asset Value

When we use the word "fund" in the context of a mutual fund, many people seem to become a little confused. 

Therefore, we must fully understand what the term "fund" means before delving further into the concepts of mutual funds.

Consider yourself the family's stock market whiz kid. You've made a few profitable stock trades, correctly predicted the market's peak and bottom a few times and so on.

As expected, your uncles, aunts, and cousins will soon ask you for financial advice. You're all thrilled with the quasi-fund manager position you've attained for yourself.

How will you manage this money is the question.

According to the law, you are not permitted to handle other people's money unless you have a license for fund management. Given this, assume that you apply for a fund management license and eventually procure one from Bangladesh Securities and Exchange Commission (BSEC).

You are now prepared to provide your fund management services to members of your family and, hopefully, in the near future, to a large number of people outside of the family.

Your family is content and eager to profit from your investment management expertise. The following family members come up to you and offer you money. Details are as follows

So you have five individual investors and each one of them has a different amount of money to invest. In total, across these five individuals, you have managed to pool in BDT 275,000/-.  

Before you get started, you need to set a few expectations –  

• All investors are treated fairly in terms of returns generated
• You are permitted to treat these individuals differ in terms of service provided.  

The two elements mentioned above are crucial, so let's take some extra time to focus on them.

Consider entering a restaurant with a friend. As a frequent customer who has brought in enough business for the restaurant, you are considered a regular there. But this is your friend's first time dining here.

You both decide to order some biryani. The biryani that you both receive will be the same in terms of both quality and quantity. However, because you frequent the establishment, the owner might decide to serve you with good silverware and perhaps even spend some time conversing with you about how you're doing. On the other hand, your friend would be treated normally and served with conventional utensils.

No difference there, you both get to eat the same thing.

Therefore, as a fund manager, you can differentiate between clients depending on how much they have contributed, but you should categorically avoid differentiating and producing two different returns for two separate customers based on their investment amounts.

Now that the standards have been set, managing this money essentially comes down to logistical considerations.

You now ask your family members to move all of the funds into a single account so that you can manage this money. The plan is to combine all the funds in one account and use those to invest in the stock market.

Since everything has been combined into a single account, the money in that account belongs to everyone. Consider this to be the explanation for why "mutual funds" are called "mutual" funds.

It is a fund manager's duty to make sure that those funds are invested in the stock market and that it expands at a healthy rate. You have the right to choose the stocks you want to invest in, determine how long to hold them for, and when to sell them. While doing this, you must make sure that each of your investors receives the same treatment in terms of wealth creation.

Keep in mind that you are pooling all of the individual funds and investing them collectively, or as a fund. Therefore, the investors' returns ought to be consistent.

In light of this, how can we guarantee that all of our clients receive returns that are distributed fairly?

To start, we can issue shares in exchange for the investments that each investor has made. The first step is to give each of these shares a notional value.

You can choose to set a starting value of 5, 10, 50, or even 100 for this hypothetical value or initial value. It makes no difference. We shall stick with BDT 10 because it is the most widely used notional value. Notional value is assigned at the start of the fund formation, which then fluctuates based on the daily investment value. In the Mutual fund world, this is called the ‘Net Asset Value ’.  

A mutual fund’s net asset value or NAV is one of the most important metrics. The mutual fund business does the following calculations at day's end. The total value of all investments plus operating costs for the mutual fund

Based on these two parameters, the NAV of a fund is estimated daily. The formula to calculate the NAV is –  

NAV= (Value of all Assets - Expenses) / Number of Shares (units)

Major Benefits of Investing in an Open-End Mutual Fund

• Great investment vehicle for maximizing your wealth
• Easy access to the most experienced and professional fund manager
• High liquidity
• Minimization of tax burden.