NAV: Value of a Mutual Fund

  • 19 December 2017 | 921 Views | By Mint2Save
What is NAV of a Mutual Fund

Net Asset Value is nothing but the true value of a mutual fund. Be it a direct investment or a regular one, NAV is going to decide how much returns have you minted or lost. Price equivalent to a stock, NAV is quite different when it comes to calculation and value assessment.  In this article, we would explore the basics of NAV and how it is going to impact on one’s mutual fund returns.

“If you ask me, over time, I am a believer in the Indian financial saving story getting stronger; a lot more savers are moving money away from gold and real estate into banks, mutual funds, insurance and equities.” – Uday Kotak of Kotak Mahindra Bank.

With this quote, learned Mr. Kotak has hit a bulls eye in defining the evolution of the savings and investment trend of the common investor. This evolution, undoubtedly, is now spearheaded by the vastly diverse and always welcome investment, Mutual Funds.

The Indian Mutual Fund Industry has investments over Rs. 22.79 trillion as of now, and these are consistently growing. The fund houses now vary from age old PSU banks to the modern western and the Japanese. Fund managers are being provided with a plethora of options that vary from ETF to money market instruments and bonds. The mutual fund market has started to get closer to its peak.

A common trend noticed while investing mutual funds is that people are not told about the current price of the fund. Rather, they are detailed with the past returns it has fetched and the returns it is probably going to fetch.

This return based approach is nonetheless effective, however, it does not reduce the importance of knowing the current price or NAV of the mutual fund.

What is Net Asset Value (NAV) of a Mutual Fund?

In simple terms, NAV is a quantitative indicator of worth of a mutual fund.

  • It represents the buying or selling price of mutual fund units.
  • It is an active tracker of the performance of the mutual fund and percentage change in the NAV over a specified time give the annual return of the fund

How is NAV Calculated?

It can be calculated using this simple formula:

Net Asset Value of a Mutual Fund = [Total Assets-Total Liabilities]/Number of outstanding units or shares.

Total assets of a mutual fund would include the investments it has made and the dividends it is going to receive.

Total liabilities refers to various expenses and fees it is going to incur along with other liabilities such as dividend payouts etc.

Number of outstanding units or shares are the total number of mutual fund units issued and are currently floating in the investment market.

When is NAV Calculated ?

Unlike a stock, where the price can vary for as long as the stock exchange is open, NAV is calculated at the end of each trading day.  This means the value considered of the stocks and other instruments in which the fund has invested, is the closing value.

Why is NAV Important?

As evident from the above discussion, NAV is the first step that decodes:

(a) How the mutual fund has performed?

(b) How has been the returns?

(c) Daily, weekly and monthly analysis can decode the volatility of the mutual fund

(d) Thus, the performance of fund managers can also be tracked using NAV as a reference level.

(e) NAV is the most critical benchmark which defines the extent to which you have created wealth using a mutual fund.

(f) It is also a measure of risk, management quality, and expenses of a mutual fund.

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