How to Assess Your Mutual Fund
Written by Rakshita Bucha Jain
Investing in mutual funds is a smart way to grow your wealth, but knowing how well your investment is performing is key to making informed decisions. Fortunately, most mutual fund apps provide you with all the tools and information you need to evaluate your investment. Let’s break down the important terms you’ll encounter and explain how to use them to assess your mutual fund's performance.
1. What’s inside your fund?
When you first open your mutual fund app, you’ll likely see a list of the stocks or assets your fund has invested in. This list is like a window into the heart of your investment.
Why it Matters?
Diversification: A well-diversified fund spreads your money across different sectors or industries, reducing risk. If your fund is heavily concentrated in one area, it might be more vulnerable to market swings.
Quality of Investments: Look at the companies your fund holds. Are they established, stable companies, or are they more speculative? The quality of these holdings can give you clues about the potential for growth and stability.
Example:
If your fund is heavily invested in technology stocks, it might experience rapid growth during a tech boom but could also be more volatile during downturns. A mix of tech, healthcare, and consumer goods stocks might offer more balanced growth with less risk.
2. What You’ve Put In: Cost Value
The Cost Value is simply the total amount of money you’ve invested in the fund. This includes all the contributions you’ve made, whether as a one-time lump sum or through regular investments like a Systematic Investment Plan (SIP).
Why it matters?
Measuring Performance: The cost value is your starting point for measuring how much your investment has grown (or shrunk) over time.
Example:
Let’s say you’ve invested ₹70,000 in total. This is your cost value, the baseline against which you’ll compare the current value of your investment.
3. What's it’s worth now?: Market Value
The Market Value is the current worth of your investment. It’s calculated by multiplying the number of units you own by the current price per unit, known as the Net Asset Value (NAV).
Why It Matters:
Tracking Growth: The market value shows you how much your investment is worth today. Comparing it to your cost value lets you see whether you’re making a profit or facing a loss.
Example:
If the current market value of your investment is ₹84,000 and your cost value is ₹70,000, you’ve gained ₹14,000—nice growth!
4. How much you own?- Closing Units
Closing Units are the total number of mutual fund units you currently hold. This number can change if you buy more units, redeem some, or reinvest dividends.
Why It Matters:
Influence on Value: The more units you own, the more your investment is worth if the NAV goes up. Understanding how many units you have helps you grasp the potential growth of your investment.
Example:
You might have started with 500 units and gradually increased to 710 units by purchasing more and reinvesting dividends. The total value of your investment is based on these 710 units.
5. The Price per Unit: Net Asset Value (NAV)
NAV is the per-unit price of the mutual fund. It’s updated daily based on the total value of the fund’s assets minus its liabilities.
Why It Matters:
Daily Performance Check: Tracking the NAV gives you a day-to-day view of how your investment is performing. A rising NAV typically indicates your fund is growing.
Example:
If the NAV today is ₹120, and you own 710 units, your investment is worth ₹120 × 710 = ₹84,000.
6. Annualized Returns: XIRR%
XIRR% (Extended Internal Rate of Return) is a powerful metric that calculates your annualized return, taking into account all your investments and withdrawals at different times.
Why It Matters:
Real Performance Insight: XIRR gives you a more accurate picture of your returns, especially if you’ve made multiple investments or withdrawals over time. It shows you how your investment is really performing on an annualized basis.
Example:
Imagine you invested ₹10,000, added ₹5,000 after six months, and withdrew ₹8,000 a year later. XIRR would calculate your annual return considering these various cash flows, giving you a clear view of your investment's performance.
7. Potential Gains or Losses: Unrealized Gains/Losses
Unrealized Gains/Losses reflect the difference between your market value and your cost value. If your market value is higher, you’re in profit (unrealized gain); if it’s lower, you’re at a loss (unrealized loss).
Why It Matters:
Knowing Where You Stand: Understanding your unrealized gains or losses helps you decide whether to hold onto your investment or make changes.
Example:
If your cost value is ₹70,000 and your market value is ₹84,000, you have an unrealized gain of ₹14,000. This is your potential profit if you were to sell today.
8. The Cost of Investing: Expense Ratio
The Expense Ratio is the annual fee the mutual fund charges to manage your investment. It’s expressed as a percentage and is deducted from your returns.
Why It Matters:
Impact on Returns: A high expense ratio can eat into your returns, so it’s crucial to be aware of it when evaluating your fund's performance.
Example:
If your fund has an expense ratio of 2% and your investment is worth ₹84,000, you’ll pay ₹1,680 annually in fees. This reduces your overall return.
Conclusion:
Evaluating your mutual fund investment isn’t just about checking your balance—it’s about understanding the different factors that affect your returns. By using your mutual fund app to regularly review metrics like the list of stocks, cost value, market value, closing units, NAV, XIRR%, and the expense ratio, you can stay informed and make smarter decisions about your investments.
Think of it as a health check for your finances. By keeping an eye on these details, you can ensure that your investments are on track to meet your financial goals, whether that’s saving for retirement, buying a home, or simply growing your wealth over time
