Net Asset Value (NAV)

What Is NAV In Mutual Funds?

 

The NAV, or net asset value, is the market value of each unit of all of the securities that the mutual fund scheme owns. Since the money from investors is invested in securities, a mutual fund always has assets under the scheme, and each investor has a certain number of units of mutual funds.

 

Individual investors pool their money into mutual funds, which then build a portfolio based on the needs of the investors and re-invest the money in the security market. Investors are given units of the mutual fund scheme in exchange for their money.

 

To figure out the Net Asset Value, we need to know the market value of all the securities, the scheme's debts, and the number of units that have been sold. The NAVs of mutual funds will be equal to the total assets minus the total debts. NAV is calculated on a per-unit basis. So, divide the net value by the number of units. This is the value of one unit in a mutual fund.

 

The market value of the assets or securities that make up a mutual fund changes every day, so the NAV in mutual funds also changes every day. Every day or every week, depending on the type of mutual fund scheme, the Net Asset Value must be made public by the mutual fund houses. The NAV must be made public on all business days for open-ended schemes, but only once a week for closed-ended schemes.

 

 

How Is NAV Calculated?

 

General Net Asset Value Calculation

 

If you put Rs 4,000 in a mutual fund with a net asset value of Rs 400, you would be able to acquire 10 units. For instance, you invest Rs 1 lakh in Mutual Fund Scheme A and Scheme B. The NAV of mutual fund plan A is 10 rupees, while that of scheme B is 20 rupees.

 

You have the following units of a mutual fund scheme allocated: Mutual Fund Scheme A: Rs 1,00,000 / Rs 10 = 10,000 units Mutual Fund Scheme B: Rs 1,00,000 / Rs 20 = 5,000 units.

 

Daily Calculation of NAV

 

After market hours each day, all mutual funds calculate the market value of the securities held. The mutual fund firm deducts all the existing liabilities and costs proportionately to compute the net asset value (NAV) of the day using the supplied formula.

 

Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

 

Assets of a mutual fund scheme are separated into securities and liquid cash. Securities include stocks, bonds, commercial paper, and other money market products.

 

The fund manager deducts all expenditures and obligations associated with operating the fund. The NAV is determined by dividing the entire value of cash and securities in a mutual fund's portfolio by the total number of outstanding units and then dividing by the remainder.

 

Role Of NAV On A Fund's Performance

 

The majority of investors assume that the net worth of an asset equals its stock price. Therefore, they believe that funds with a smaller net asset value are cheaper and, therefore, superior investments. However, there is no correlation between the net asset value computation and the performance of the fund. The fact that a fund has a smaller net worth does not make it an all-inclusive investment.

 

The net worth of an asset essentially reflects the performance of the underlying assets over the preceding years. Therefore, investors should not use this criterion when selecting funds to invest in. They must examine the returns on their investments in order to make an educated choice.

 

Therefore, the net value of an asset is important for assessing the daily performance of a fund. It does not imply a fund's profitability. Before deciding to invest, investors should evaluate the current cost of money and its past performance.

 

Difference Between NAV And Market Price

 

Numerous investors mistakenly believe the Net Asset Value (NAV) and the market price to be the same, despite the fact that the two notions are quite distinct. Therefore, when a mutual fund has a lower NAV, many investors incorrectly conclude that it is cheaper and a favourable investment opportunity. Clarify the notion by understanding the function of NAV and why this assumption is incorrect.

 

When a corporation is listed on the stock market, its shares become available for purchase by investors. On the stock exchange, the price of the shares is posted so that investors can purchase them. This is the share's current market price. The market price is determined by a number of elements.

 

Variables include the demand-to-supply ratio of shares, the company's future potential, and its historical success. Therefore, the share market price is a pure price influenced by a variety of circumstances.

 

There is no such notion or stock market listing for mutual funds and their units. Mutual fund units are purchased at book value or net asset value. The net asset value is the overall value assigned to mutual funds at day's end and market closing.

 

Conclusion

 

When investing in mutual funds, it is essential to evaluate return expectations, investment objectives, risk tolerance, etc. NAV plays a crucial part in determining how many fund units you will receive for a certain amount of money. However, it is essential to realise that a low NAV does not inevitably indicate a strong fund, nor does a high NAV necessarily indicate a terrible fund.

 

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