NAV in mutual funds growth plan? how does it? with exmaple

 in above case, how does our amount become compounding, how does it crosses inflation of every year 8-9%? using general rune 8-4-3, how does mutual investment grow ?

ChatGPT said:

Understanding Compounding and Inflation in Investment Growth:

Compounding in Investments:

Compounding grows your investment by reinvesting the returns, creating a "snowball effect." Over time, your returns also start earning returns, which accelerates growth.

Impact of Inflation:

Inflation erodes the purchasing power of money, meaning your investment must grow faster than the inflation rate to provide real gains.

For example:

• Inflation Rate: 8% per year
• Investment Return: 12% per year
• Real Return (adjusted for inflation): $12\% - 8\% = 4\%$

---

General Rule 8-4-3 for Mutual Fund Growth:

This rule explains how investments grow based on three parameters:

1. 8% Rule: Average inflation rate in developing economies like India.
2. 4% Real Return: The return after subtracting inflation (12% return - 8% inflation).
3. 3% Net Real Return: If taxes, fund management fees, or other costs consume an additional 1%, you may retain a 3% net return.

---

How Does Mutual Fund Investment Grow?

1. Growth Formula:

   $$\text{Real Value} = \text{Future Value} / (1 + \text{Inflation Rate})^t$$

2. Example for ₹12,00,000 (Lump Sum Investment):

   • Investment Growth: ₹37,26,993 (after 10 years at 12% return).
   • Inflation Adjustment: With 8% annual inflation: $$\text{Real Value} = \frac{37,26,993}{(1 + 0.08)^{10}} = \frac{37,26,993}{2.1589} \approx ₹17,26,312$$
     • The purchasing power of ₹37,26,993 in 10 years is equivalent to ₹17,26,312 today.

3. Net Growth After Inflation:

   • Initial Investment = ₹12,00,000
   • Real Value After 10 Years = ₹17,26,312
   • Net Real Growth: $$\text{Net Growth} = ₹17,26,312 - ₹12,00,000 = ₹5,26,312$$
   • The investment beats inflation, offering significant real returns.

---

How Does Mutual Fund Growth Compensate for Inflation?

Mutual funds grow through:

1. Equity Exposure: Provides higher returns (12%-15%) compared to inflation.
2. Compounding: Longer durations amplify the effects of reinvested returns.
3. Diversification: Reduces risk and enhances stability of returns.

Why Mutual Funds Beat Inflation:

• Example: Parag Parikh Flexi Cap Fund:
  • Average annual return: 14% over the past 10 years.
  • Real Return After Inflation: $14\% - 8\% = 6\%$, which compounds over time.

---

Illustrative Table for Mutual Fund Growth vs. Inflation

Year	Investment Value (12%)	Inflation Value (8%)	Real Value
0	₹12,00,000	₹12,00,000	₹12,00,000
5	₹21,31,441	₹17,63,915	₹12,08,360
10	₹37,26,993	₹31,84,212	₹17,26,312

---

Conclusion:

• Mutual Funds Beat Inflation: With returns > inflation, mutual funds grow wealth effectively.
• Compounding Helps Long-Term Investors: The longer you stay invested, the more compounding offsets inflation.

Would you like further assistance in selecting funds or projecting your investments?

You said:

in mutual funds schema direct growth, how does NAV is calcuated, over period of time, how does it value changes, if any profits gains, how does it become compounding? example with example ?

ChatGPT said:

Understanding NAV (Net Asset Value) in Mutual Funds

NAV Definition: Net Asset Value (NAV) is the per-unit value of a mutual fund, calculated as the fund's total assets minus total liabilities, divided by the total number of units.

Formula for NAV:

$$\text{NAV} = \frac{\text{Total Assets} - \text{Total Liabilities}}{\text{Number of Outstanding Units}}$$

---

How NAV Changes Over Time:

1. Market Value of Assets:

   • Mutual funds invest in a portfolio of stocks, bonds, or other securities. The NAV changes as the market value of these assets fluctuates.

2. Dividends and Capital Gains:

   • If the fund earns dividends from stocks or interest from bonds, these are added to the total assets, increasing the NAV.
   • Capital gains from selling securities at a profit also increase NAV.

3. New Investments:

   • When new investors buy into the fund, the number of units increases, but the NAV remains unaffected as the investment adds to the fund's total assets proportionally.

4. Expense Ratio:

   • The fund deducts expenses (management fees, operational costs) periodically, which slightly reduces the NAV.

---

Example of NAV Calculation Over Time:

Initial Scenario:

• Total Assets: ₹12,00,00,000
• Total Liabilities: ₹2,00,000
• Number of Units: 1,00,000

$$\text{NAV} = \frac{12,00,00,000 - 2,00,000}{1,00,000} = ₹119.80$$

---

After One Year:

• Annual Growth Rate: 12%
• Assets Value: $₹12,00,00,000 \times 1.12 = ₹13,44,00,000$
• Dividends Earned: ₹4,00,000
• Expenses: ₹2,00,000
• Total Liabilities: ₹2,00,000 (unchanged)
• Units Outstanding: 1,00,000 (unchanged)

$$\text{NAV} = \frac{13,44,00,000 + 4,00,000 - 2,00,000}{1,00,000} = ₹135.20$$

---

Compounding in Mutual Funds:

When profits (like dividends or capital gains) are reinvested instead of distributed to investors, the NAV grows faster. This reinvestment allows your returns to generate further returns, creating a compounding effect.

Example of Compounding:

• Initial Investment: ₹1,00,000
• NAV at Start: ₹119.80 → $\frac{₹1,00,000}{₹119.80} \approx 835.86$ units.
• NAV After 1 Year: ₹135.20
• Investment Value After 1 Year: $$835.86 \times ₹135.20 = ₹1,12,975.47$$

Here, your returns of ₹12,975.47 can be reinvested for the next year, compounding further.

---

How NAV Reflects Growth:

1. Daily Updates:

   • NAV is calculated daily based on the closing value of the fund's assets.

2. Market-Linked Returns:

   • The fund's NAV grows in line with the performance of its underlying securities.

3. Compounding Gains:

   • If you opt for a growth scheme (no dividend payouts), the NAV reflects all accumulated profits, enabling faster compounding.

---

Illustrative Table of NAV Growth Over 5 Years:

Year	NAV Start	Annual Growth (12%)	NAV End
1	₹119.80	₹14.38	₹135.20
2	₹135.20	₹16.22	₹151.42
3	₹151.42	₹18.17	₹169.59
4	₹169.59	₹20.35	₹189.94
5	₹189.94	₹22.79	₹212.73

---

Conclusion:

• NAV Reflects Fund Growth: It increases due to reinvestment, market performance, and compounding.
• Compounding Accelerates Growth: A higher NAV over time means your investment appreciates exponentially as gains are reinvested.

Would you like more details on how to choose funds or track NAV growth?