Net Asset Value (NAV) is nothing but the total market value of all the assets held in the mutual fund portfolio less the liabilities, divided by all the outstanding units. That amounts to nothing but the “book value”.
The NAV measures how much each share of a mutual fund is worth. So essentially, the NAV of a mutual fund is the cost of one share of the fund.
How is it calculated?
The total assets of a mutual fund usually falls into two categories – cash and securities. Securities include stocks and bonds. So the total asset will include the market value of all its cash, stocks, and bonds. Liquid assets, dividends to be received, interest accrued also need to be included in the total assets.
At the same time, the mutual fund will have some money that it will owe to some creditors. That is its liabilities. There will be some expenses that has accrued over time and yet to be paid, this also needs to be included.
Let us see that in a formula.
Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding Units)
Where Assets = Market value of the fund’s investments + Receivables + Accrued Income
Debts = Liabilities + Accrued Expenses
The market value of stocks and debentures is taken as the closing price on the major stock exchange where it is listed.
In case of corporate, the share price is quoted on the stock exchange. This price apart from the fundamentals is also dependent on analysts’ view of the company’s future performance and the demand-supply scenario. Hence the market price of a stock is different from its book value. However in the case of a mutual fund there is no concept as market value for the MF unit. Therefore, when we buy MF units at NAV, we are buying it at book value. At this time we are paying the right price of the assets, be it Rs 10 or Rs 50.
Net Asset Value (NAV) should not be the only criteria before choosing any fund for mutual fund investment. Net Asset Value (NAV) is the value of a unit of mutual fund and high NAV doesn’t implies fund will perform great in future.
Main factor before choosing mutual fund scheme should be your investment objective and then your risk capacity, time duration etc.
Net Asset Value (NAV) is important in choosing mutual funds but not alone. What can you conclude just by looking at the market price of a share? You need to know the past performance of the mutual fund, its future prospects, how much return do you expect if you invest in the mutual fund. Based on all the information, you decide whether the Mutual fund is under-valued or over-valued and accordingly, you make your investment decision.
Therefore, Net Asset Value (NAV) is important but along with other information which render Net Asset Value (NAV) useful.
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.
On redeeming mutual fund scheme units the return earned is linked to the day’s Net Asset Value (NAV). Only redemption applications received at the concerned service centers by the stipulated cut-off time would qualify for Net Asset Value (NAV) of the same day. For applications received post that time the next business day’s Net Asset Value (NAV) would apply.
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