Do you rely on your money manager for the investments? Maybe it is time you understand more about the investments made by yourself first. For example, how does Net Asset Value (NAV) affect the mutual fund investments? Let us first see what Net Asset Value means in mutual funds.
The Net Asset Value is the sum total of the market value of all shares in a portfolio including cash. This portfolio less the sum of liabilities and divided by a total number of outstanding units. Hence, one can derive to the Net Asset Value. NAV can be derived daily, weekly or monthly. In India, it is calculated at the end of the market day. Since the stocks and bonds are flexible and change every day, the price of NAV also changes each day.
The definition of NAV is the value of fund assets less the value of its liabilities per unit.
Net Asset Value = (assets - liabilities) / total number of units
Let us take an example here.
John wants to make an investment in the mutual funds. But whenever he talks to his friends, a term called “NAV” pops up. After doing a little research, he understood the term and the meaning of NAV. Net Asset Value per unit is the price of one Mutual Fund.
Now, John makes an investment in the Mutual fund called X. As of today, the total value of (assets - liabilities) is 100 Crores and the “total number of units” held by many investors is 10 Crores. Hence the Net Asset Value of Z for that day will be Rs. 10. Hence, if John invests Rs 10,000 in Mutual Fund X, he will get 1000 units of Mutual funds since the NAV of the Mutual fund is Rs 10 today.
After a few days, the NAV goes up at Rs 12. John decides he wants to sell his 1000 units. Hence, 1000 units X Rs. 12 = Rs. 12,000. John will get Rs. 12,000 as his profit.
In the corporate world, Net Asset Value alone cannot tell the performance of the company and is only to check the ratios. For an individual, Net Asset Value of a fund is irrelevant because it represents the market value of the investment and not the market price.
One can misunderstand the Net Asset Value for Stock Price. NAV cannot indicate the performance of the mutual fund, unlike a stock price. If you are planning to invest in a mutual fund, do not let the NAV be the deciding factor for the shortlisting.
Investors are attracted towards low NAV because of the misconception that money can provide more units which will be good when the fund declares a dividend.
Another misconception is that the higher value NAV mutual funds have maxed out their potential and no longer lucrative. But, at the end, it is the performance of the fund that matters and not the Net Asset Value. For example, a growth of 50% with NAV of 50 is the same as the 50% growth with NAV of 500.