What is Net Asset Value (NAV)?
Net Asset Value (NAV) refers to the price at which an investor buys the units of a mutual fund scheme. It represents the market value per share for a particular mutual fund.
NAV is calculated by deducting the liabilities from total asset value divided by the number of shares.
An investor can sell units of Mutual Funds on NAV, but the selling price can be lower than NAV if there is an exit load, that is always chargeable as a percentage of the NAV.
NAV helps to determine which investment might opt to redeem or keep in their investment portfolio by providing a reference value.
For example, If an investor investing ₹6,000 in a mutual fund scheme with a NAV of ₹150. You will receive 40 units (6,000/150). And, if the NAV increases to ₹ 170 in a year and the investor decide to sell it. Then the investor will collect or received ₹ 6,800 (40 units X ₹ 170). But if the exit load is applicable in the scheme at the rate of 1%, then the investor will be received ₹ 6732 (40 units X ₹ 168.3 NAV minus the exit load or minus ₹6,800 of 1%).
The Formula for a Fund‘s NAV
NAV = (Assets – Liabilities) / Total number of outstanding shares
How is NAV calculated?
1. General Net Asset Value Calculation
If a mutual fund has a NAV of ₹300, then that is how much you will have to pay for one unit of that mutual fund. Conversely, if you invest ₹5,000 in a mutual fund with a net asset value of ₹500, then they will allow you 10 units of that fund.
Fluctuations of these prices are subject to the changes as per the share market that is why mutual fund portfolio comes with day to day value.
2. Daily NAV Calculation
All mutual companies evaluate their portfolio total worth after the stock market closes at 3:30 p.m., daily. The market reopens again on the next day with the previous day’s closing share prices. The fund house accordingly deducts all the outstanding liabilities to calculate net asset value (NAV) of the day using the given formula.
How is NAV relevant to the investors?
Investors should focus on the scheme’s performance and the returns generated while investing in a mutual fund scheme.
Because most investors think that the net value of an asset is to be the same as the price of its equity share. But it is not true, the calculation varies from each other, as only the liquid assets of a company are included to regulate the price of equity shares, whereas the valuation of both liquid and non-liquid assets are taken into account for the calculation of NAV.
Thus, total equity represents a company’s working capital, while the net value of an asset gives a company’s total monetary worth.
Therefore, the net value of an asset is necessary to make proper decisions about the funds an investor opts to invest in.
NAVs don’t reflect the future prospects of the mutual fund scheme. It is just the total value of the mutual fund scheme investments fewer liabilities and expenses.
Therefore, a higher NAV means the scheme investments have prospered really well or the scheme has been around for a long period. Investors should focus on the scheme’s performance and the returns generated while investing in a mutual fund scheme.
Role of NAV in fund performance
A lot of investors believe that net asset value is similar to a stock price.
This causes them to believe that a fund with a lower NAV is cheaper and it’s, a better investment.
But the NAV calculation doesn’t have any related to the fund’s performance. Just because a fund has a lower net value does not make it a comprehensive investment.
Thus, it should not be the only determining factor to choose a mutual fund.