As we discussed in our mutual fund article, the units allocated into an account are based on the NAV of that mutual funds. Today we’ll see what NAV is, how it is calculated and how it affects the money invested.
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NAV = Net Asset Value?
In very simple terms, NAV is nothing but the price you pay to buy the unit of mutual funds. So, if the Net Asset Value of a mutual fund is 22.85, that simply means you would need to pay Rs 22.85 to purchase one unit of that mutual fund. Most of the time, the unit cost of mutual funds begin with Rs. 10 and increase as the assets under the funds grow. Going by this rule, the more popular a mutual fund is, the higher is its Net Asset Value. But of course, it is not an indicator of whether or not a fund is good or bad, or rather cheap or expensive. There’s a whole list of things that you should look for when you are purchasing a mutual fund or SIP.
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How Net Asset Value calculated?
The calculation of NAV is pretty simple and straightforward. It has a very basic formula, that is NAV = (Total asset – total liabilities)/ total outstanding shares It is calculated based on the day’s closing prices for each individual asset. So at the end of every day the NAV is updated, after the stock market closes at 3:30 pm. The market reopens the day after with the closing prices of the previous day. The fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day, using the formula mentioned above.
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How is NAV relevant to investors? Is low NAV good or high NAV good or bad?
A lot of investors think net asset value is similar to a stock price. This causes them to believe that a fund with a lower net asset value is cheaper and hence, a better investment. In truth, it is not an indicator of mutual fund performance. A lower value alone does not make a fund a better investment or vice versa. Hence, it should not be the only determining factor to choose a mutual fund. So, Net Asset Value doesn’t really reflect a lot when it comes to fund selection and just one of the parameters that you (term audience as investor),. There’s a whole bunch of things that you should consider before selecting a fund for investment.
