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Net Asset Value Explained- Part 1

4 Mins 21 Dec 2022 0 COMMENT

Knowing the NAV of a fund can only help you understand the unit's price on that day. It will be of relevance to the cost of the unit in a fund while buying or selling. Was that a lot of jargons for you? Let us get to the basics and understand what is NAV or Net Asset Value.

Mutual fund scheme consists of several units. Let us take this with an example of a book:

The book is made up of smaller units we call a page. Each page has a page number assigned to it. Similarly, the units of a mutual fund are assigned a value. The value of each unit is known as Net Asset Value/NAV. Similar to the price of each share, NAV refers to the price of each mutual fund unit and like the price of share, the NAV of a mutual fund also fluctuates as per the market. Thus, the NAV in a mutual fund is calculated every day. A mutual fund's NAV is computed when the market closes at the end of each day.

You definitely have some questions, let me answer some of them:

Is it necessary for you to know the NAV of a mutual fund?

Absolutely, knowing the NAV of a fund will let you know the price at which you can purchase the units of that fund. Let us say for example the NAV of a fund is 10, then the price you will have to pay for each unit is Rs 10. It is thus a determining factor while selling and buying units. It will help you know the number of units you have purchased in a fund and the price at which you can buy them.

How is it calculated?

The formula used for calculating NAV is simple. It is the total assets minus the total liabilities divided by the total number of units issued. To understand how the calculation of NAV is done, you first need to understand the concepts used while calculating NAV.

These are:

  • Total asset:

    It is the market value of all the securities in a portfolio. It means the investments made in a scheme. This would include equities, bonds, debentures, dividends, and interest accrued.
  • Total liabilities:

    Liabilities are the expenses incurred by the fund house, the management or the remuneration paid to the fund manager. They also include the amounts owed towards outstanding payments, money payable, or lenders or foreign liabilities.
  • Units:

    It is the total of all units held by the investor in a mutual fund.

When is nav calculated?

Nav is calculated daily at the end of the market day after it closes to maintain some uniformity. But, unlike the stock market the fluctuation is not based on demand and supply. Rather, it is based on the book value of asset.

If the NAV is high or low. is there a threat to the performance of your funds?

NAV of a fund does not indicate the performance of your fund; it only denotes the price of your fund. A high or a low NAV does not determine how lucrative you are fund is. There's a misconception that if the NAV of a mutual fund is high, it will yield you better returns or if the NAV of the fund is low, the cheaper is the investment and the number of units given will be more significant. However, this is not true. If you have the same amount invested into identical scheme, the NAV of your fund is irrelevant. The difference you will find is in the number of units held, among others. The NAV will not determine your investment growth or future returns.

In conclusion, the nature, assets and liabilities of each scheme are different. Therefore, by looking at the NAV in mutual funds you need to focus on the profitability and not changes of the NAV. Knowing the Net Asset Value of a fund can only help you understand the unit's price on that day. It will be of relevance to the cost of unit in a fund while buying or selling.