Basics of Mutual Fund and common Parameters.

Published by:-Anand(B.Tech, M.Tech, MBA Finance) 

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Mutual funds have different types of parameters, which can help investors evaluate and compare different funds.

Here are some common types of parameters in mutual funds:

1.   CAGR (Compound Annual Growth Rate):

 CAGR is a measure of the rate of return on an investment over a specific period of time, taking into account the effects of compounding. It is calculated by taking the ending value of an investment, dividing it by the beginning value, raising the result to the power of 1/n, where n is the number of years, and then subtracting 1.

CAGR = (Ending Value / Beginning Value) ^ (1/n) - 1

For example, if an investment had an initial value of 10,000 and grew to 15,000 over a 5-year period, the CAGR would be:

CAGR = (15,000 / 10,000) ^ (1/5) - 1 = 8.14%

2.   XIRR (Extended Internal Rate of Return): 

XIRR is a measure of the annualized return on an investment, taking into account the timing and amount of cash flows. It is used to calculate the rate of return when the cash flows are not evenly spaced over time. XIRR can be calculated using spreadsheet software or financial calculators.

For example, if an investment had an initial value of 10,000, received a cash inflow of 5,000 after 2 years, and another cash inflow of 7,000 after 4 years, the XIRR would be the rate at which the net present value of these cash flows is equal to zero.

3.   IRR (Internal Rate of Return): 

IRR is a measure of the profitability of an investment, taking into account the time value of money. It is the discount rate that makes the net present value (NPV) of the investment equal to zero. IRR can be calculated using spreadsheet software or financial calculators.

For example, if an investment had an initial value of 10,000 and generated cash flows of 2,000 per year for 5 years, the IRR would be the rate at which the net present value of these cash flows is equal to zero.

The IRR is often used as a tool to compare different investment opportunities or to evaluate the feasibility of a new project. Generally, the higher the IRR, the more attractive the investment or project is considered to be.

4.   Absolute return: 

It refers to the total return or profit that an investment generates over a certain period of time, regardless of market conditions. It is a measure of the actual gain or loss of an investment, rather than its performance relative to a benchmark or index. Absolute return strategies aim to generate positive returns regardless of whether the overall market is going up or down. These strategies typically involve using a range of investment techniques, such as short selling, leverage, and derivatives, to achieve their objectives. Absolute return is often used as a performance benchmark for hedge funds and other alternative investments.

5.  Net Asset Value (NAV) - 

The value of one unit of the mutual fund scheme.

6.   Dividend Payout Ratio - 

The percentage of profits that are distributed as dividends to the investors.

7.   Exit Load - 

The fee charged by the mutual fund company if an investor exits the fund before a certain period of time.

8.   Expense ratio: 

The expense ratio is the annual fee charged by a mutual fund to cover its expenses, such as management fees, operating costs, and administrative expenses. A lower expense ratio can be beneficial for investors as it can increase their net returns.

9.   Assets under management (AUM):

 AUM is the total value of all the investments in a mutual fund. Higher AUM may indicate that the fund is more popular and has more resources to invest in a wider range of securities.

10.   Minimum investment: 

Some mutual funds require a minimum investment amount, which can range from a few hundred to thousands of rupees. Investors should check the minimum investment requirement before investing in a mutual fund.

11.   Investment objective: 

The investment objective of a mutual fund specifies the type of securities the fund will invest in, such as stocks, bonds, or a combination of both. Investors should choose a mutual fund that aligns with their investment objectives and risk tolerance.

12.   Performance: 

Mutual fund performance is the return earned by the fund over a specified period, such as one year, three years, or five years. Investors should consider the fund's historical performance when evaluating its potential returns.

13.   Risk: 

Mutual funds can have different levels of risk, depending on their investment objectives and the types of securities they invest in. Investors should consider the risks associated with a mutual fund and determine if it aligns with their risk tolerance.

14.   Dividend policy: 

Some mutual funds may pay dividends to their investors, while others may reinvest the dividends called IDCW.

15.   Fund manager: 

The fund manager is responsible for managing the mutual fund's investments and making investment decisions. Investors should consider the fund manager's experience, track record, and investment philosophy when evaluating a mutual fund.