When we talk about Mutual funds always note a term called Net Asset Value.beginners and common peoples have many confusions about the NAV. In this post, we will discuss the basics of the NAV and its importance.
Also read: Benefits of mutual fund Investing
Net Asset Value NAV
Net Asset Value (NAV) is defined as the market value of a mutual fund unit. The overall cost of a mutual fund depending on this market value per fund unit. If you will add the market value of shares in the respected fund and divide it by the number of total units of the mutual fund, the resulting value will be the NAV. Net Asset Value is simply the price per share of a mutual fund. Just like shares having a share price the mutual funds have a net asset value. usually, mutual fund units are beginning with a unit-price of ₹10. and it grows as the fund’s assets under the asset management company grow.
How is NAV relevant to investors?
A higher Net Asset Value means the fund has performed and grown really well or the scheme has been around for a long period. A lower NAV tells us that either the fund is new in the market or it is low performing. but Net Asset Value does not reflect the future prospects of the mutual fund scheme. so It is not a good idea to make your investment decision based on the NAV of a mutual fund scheme.
Difference between NAV & Market Price
many Investors believes that the net asset value and the market price of an equity share are the same, but it is not true. we might be selling or buying the mutual fund units at NAV but it shouldn’t be confused with the market price of a unit. The share price is deciding by investors in the stock market. Whereas the investors are not deciding the NAV of a mutual fund unit. Factors like demand-supply and the company’s potential also a factor to determine the share price. So, the NAV is always different from the market price of a share.
How does investment-timing affect the NAV
A mutual fund company releases its latest NAV on every working day, and it is strictly time-bound. This is the reason why mutual funds are keeping a deadline for daily investments, which is 2 p.m. for liquid funds and 3 p.m. for equity or debt funds. You will receive the NAV of the same day, the previous day, or the next day according to the time you submit your application and funds.
If you are investing before 2 pm in a liquid fund, you will get units at the NAV of the previous day. This will happen only if you also transfer the money before the deadline time. If you submit your application before 2 p.m. but you fail to transfer the fund before the deadline time, you are eligible for the previous day’s NAV.
The deadline time is 3 p.m In the case of equity and other debt funds, If you submit the application before 3 p.m, you will get the unit on the basis of the same day’s NAV. if you are submitting the application after the deadline time will get the NAV of the next day. Unlike liquid funds, it is not necessary to transfer the funds before such a timeline.
How to calculate the NAV?
There are two methods are there for calculating the NAV,
1. General Net Asset Value Calculation
The general NAV is considering as the price of its equity shares and is given by the growing cost of the individual shares. This calculation will give the market value of a particular asset and is subject to change as per market conditions and market fluctuations.
2. Daily NAV Calculation
All mutual companies are estimating their portfolio worth after the stock market closes at 3:30 p.m every day. and the market will open again the next day with the previous day’s closing share prices. The fund house will deduct all the outstanding liabilities and expenses accordingly to calculate the net asset value of the day using the given formula.
Net Asset Value (NAV) = [Assets – (Liabilities + Expenses)] / Number of outstanding units
Assets in a mutual fund scheme is divided into securities and liquid cash. Securities including equity, debentures, bonds, and commercial papers. Interest accumulated and dividends are also part of the assets.
The cash balance in the bank account will add and the money payable to others are subtracted to determine the net asset value of the fund. also, the fund manager deducts daily expenses to manage a fund.
Final Thoughts
When we search or talk about mutual funds, we find the term NAV. but many common people are unable to understand what it is. NAV is an important factor in the mutual fund. we must know what is NAV and its importance. in this post, we discuss what is NAV and its importance. i hope this post will give you a basic idea about the Net Asset Value(NAV).
Happy Investing