We all have heard of NAVs (Net Asset Value). The units of Mutual Funds which we invest in and the value of which determines the amount we receive when we exit the fund. It plays an important role in determining the value of a Mutual Fund, but have you ever wondered how? This blog explains the fundamentals of an NAV and the way to calculate the value.
What is the Net Asset Value (NAV)?
The NAV determines the current value of a mutual fund. It represents the fund’s market value. Basically, it is the price calculated after dividing the total value of assets per portfolio, subtracted by all the liabilities. The NAV of a fund is calculated by the mutual fund house or the accounting firm hired by the mutual fund. All the transactions carried out by investors are conducted at prices linked to the NAV of the particular scheme.
How is the NAV Calculated
NAV of a fund changes daily. It fluctuates depending on the changes in the value of the securities held. It includes the total assets of each mutual fund which is the sum of the current market value of all the securities held in the particular portfolio, cash and accumulated income. The current liabilities and expenses that are spent in building and management of the particular portfolio and servicing the investors, up to the limits permitted by SEBI, are deducted to arrive at the net assets of the particular fund.
The NAV can’t be calculated during the market hours as the prices of the holdings change every minute. NAV of a particular fund is calculated after taking into account of closing market prices of securities that the fund holds.
What does high and low NAV indicate?
The NAV whether high or low doesn’t affect the rate of returns. To understand let us look at this example, Here are 2 schemes X and Y where we invest a sum of money. Scheme X has a NAV of Rs. 50 and Y has a NAV of Rs. 10. We have made an equal amount of investment in both the schemes of Rs. 1,00,000. Scheme Y would now come as a cheaper buy because we here, got 10,000 units as against 2,000 units in Scheme X.
Now, let us imagine that both the scheme’s returns are 10 percent per month. The NAV for scheme Y now will be Rs. 11 and Scheme X will have a NAV of Rs. 55. The value of your investment in both the cases was Rs. 1,10,000. Therefore, we saw that the NAV of a particular scheme is inappropriate, as far as generating the returns are concerned. The only difference, in this case, is that in Scheme Y, the investor gets more number of units than in Scheme X where he gets a lesser number of units. For both this schemes with identical portfolio and other things remaining constant, the difference in NAV does hardly matter as long as the schemes keep deliver the same returns.
The amount of investment in different schemes is the same, but only the NAVs are irrelevant. An investor only needs to look closely at the returns given by the particular scheme.
Further, daily change in the NAV of a mutual fund indicates the rise or fall in the assets of the particular scheme. Financial planners advise investors, that when they select a particular mutual fund scheme for managing their investments, daily changes in the NAV do not matter. Investors should only focus on the annual return of the fund over different time frames to judge its performance in the market.
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