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Understanding Historical changes in NAV
Business Scenario
You are working as a Mutual Fund Analyst at an investment advisory firm. A client wants to understand how a mutual fund's NAV changes over time and how market conditions affect fund performance. In this lab, you will analyze the historical NAV performance of a mutual fund, compare it with its benchmark, and evaluate how changes in equity markets and interest rates impact the fund's NAV.
Pre-Lab Preparation
Topic : NAV Computation
1) Asset valuation
2) Income accrual
3) Expense accrual
4) Units outstanding
5) NAV computation process
Task 1: Analyze Historical NAV Changes
Objective
Study how a mutual fund's NAV has changed over different time periods.
Activity
Visit Value Research Online or AMFI India and select any Equity Mutual Fund.
Record the following information:
| Parameter | Observation |
|---|---|
| Fund Name | |
| Current NAV | |
| 1-Year Return | |
| 3-Year Return | |
| 5-Year Return | |
| Benchmark |
Questions
-
Has the NAV generally increased or decreased over time?
-
During which period did the fund perform the best?
-
What factors could have influenced the NAV movement?
-
Did the fund outperform or underperform its benchmark?
Sample Answers
-
The NAV has generally increased over the long term.
2. The highest growth was observed during a strong equity market period.
3. Market performance, economic conditions, corporate earnings, and interest rates.
4. Compare the fund's returns with its benchmark to determine outperformance.
Task 2: Analyze NAV Changes Based on Market Movement
Scenario
A mutual fund has the following portfolio:
| Asset | Portfolio Weight |
|---|---|
| Equity Shares | 70% |
| Corporate Bonds | 20% |
| Cash | 10% |
Current NAV = ₹20.00
Scenario A: Bull Market
The equity market rises by 15%, while bonds and cash remain unchanged.
Tasks
- Estimate the overall portfolio return.
- Calculate the new NAV.
Solution
Portfolio Return
= 70% × 15%
= 10.5%
New NAV
= ₹20 × (1 + 10.5%)
= ₹22.10
Scenario B: Bear Market
The equity market falls by 12%, while bonds and cash remain unchanged.
Tasks
-
Estimate the portfolio return.
-
Calculate the new NAV
Solution
Portfolio Return
= 70% × (-12%)
= -8.4%
New NAV
= ₹20 × (1 − 8.4%)
= ₹18.32
Scenario C: Interest Rate Increase
Assume:
-
Equity remains unchanged.
-
Bond prices fall by 5% due to rising interest rates.
-
Cash remains unchanged.
Tasks
-
Estimate the portfolio return.
-
Calculate the revised NAV.
Solution
Portfolio Return
= (20% × -5%)
= -1.0%
New NAV
= ₹20 × (1 − 1%)
= ₹19.80
Congratulations on completing this lab!
You analyzed historical changes in mutual fund NAV, compared fund performance with benchmarks, and studied how different market conditions affect NAV movements. You also learned how equity market performance and interest rate changes influence mutual fund returns. These concepts provide a strong foundation for understanding mutual fund performance analysis and investment decision-making.
Checkpoint
Next-Lab Preparation
Topic : Alternative Investment Funds (AIF) and hedge funds
1) AIF categories
2) Hedge fund strategies
3) Role of hedge funds
4) Role of prime broker
5) Fund administrator function
Understanding Historical changes in NAV
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