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How does interest in mutual fund lump sum investment works

I would be most obliged if you could explain in brief about how interest to the principal amount works in a lump sum mutual fund investment works. Let me give you a scenario, say I have a lump sum investment of 6 lakhs in a Mutual fund. This has been started on 15th November 2016. The NAV at that moment was 18. Now my question is, does my investment solely depend on the NAV in about 15 years or is there some kind of interest compounded annually. More specifically, would my units purchased initially remain the same over 15 years or will there be an automated purchase done?

Jun 8, 2017 by Ke Chi,   |   Mutual Fund

Please note that there are no assured returns in mutual funds and therefore no interest is payable to you. Since no interest is payable, there is no way to that we can explain as to how the interest works in case of mutual funds.

Coming to the second point, please note that appreciation in mutual fund is denoted by the growth in its NAV. In your example – you invested Rs 6 Lakhs lump sum in a mutual fund scheme (Growth option) on 15th November 2016 @ NAV Rs 18. Therefore, you got 33,333.33 units. Say after 15 years the NAV is Rs 109, then your investment value would be Rs 36,33,333.32 (Total units 33,333.33 x NAV Rs 109). You got a profit of Rs 30,33,333.33. There will be no addition of units during this 15 year’s time period and therefore the total number of units will remain same at 33,333.33.

Therefore, you can see the returns in mutual funds are a function of appreciation in NAV. Now let us come to a live example – Today’s NAV of Reliance Growth Fund (Growth option) is Rs 1019.2011. Those who invested Rs 1 Lakh in the new fund offer (NFO) of this scheme got 10,000 units. The value of Rs 1 Lakh invested in the NFO, is now at Rs 1,01,92,011 (10,000 units x Rs 1019.2011). The fund has grown over 100 times since its inception date.

Hope you are now clear how the returns work in case of mutual fund investments.

Thanks for writing to Advisorkhoj.

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