Net Asset Value or NAV is a representation of the market value of a share for a mutual fund. The mutual fund NAV is calculated by deducting the total liabilities from the total asset value and then dividing it by the total number of shares. Note that the net value of a given asset is mostly weighed in for open-end funds. To ascertain the price of each unit in a fund, individuals need to add up the market value of a portfolio and then divide the same by the total number of current funds.
Let’s dive deeper into the topic of Mutual Fund NAV to understand it and its role better.
Importance of Net Asset Value (NAV) of Mutual Fund
The cost of mutual funds units usually starts at Rs. 10 and then surges as the assets under the fund’s umbrella expand. Hence, as per this rule, the higher the net asset value (NAV) of a mutual fund, the more popular the fund.
Notably, mutual fund NAV assists in determining which investment should remain in the investment portfolio and which should not, thus giving a reference value. Since the net asset value represents the “per-share” value of a mutual fund, it becomes easier to value and transact the mutual fund shares.
Mutual Fund Net Asset Value (NAV) Formula
Net asset value is equal to or close to the actual book value per share of a venture.
Net Asset Value= (Assets – Liabilities) / Total number of outstanding shares
Notably, companies believed to possess high growth prospects are typically valued more than their net asset value may suggest. In case of closed-end funds, net asset value is mostly compared to the market value per share to find overvalued or undervalued investments.
Net Asset Value and Mutual Funds
Mutual funds raise money from a pool of investors and then invest it in assets such as stocks, money market instruments, Unit-Linked Insurance Plan, and bonds.
Everyone who invests receives a certain number of shares in proportion to the amount of money they invested. Notably, the price of each share is determined by the Net asset value.
Unlike a stock, whose changing prices are published throughout the day, the price of the mutual fund is based on an end-of-day methodology that is based on the activity of the fund’s securities.
A mutual fund manager computes the closing price of securities in its investment portfolio after trading, adds the value of extra assets, accounts for all liabilities, and then calculates the mutual fund NAV based on the outstanding share units.
The Role of NAV in the Performance of a Mutual Fund
Most investors assume that an asset’s value is equivalent to its stock price. This is why, they also believe that mutual funds with smaller net asset values are less expensive, which means they are better investments. However, the net assets value computation is unrelated to the mutual fund’s performance. It should be remembered that just because a mutual fund has a lower net value it is not necessarily a good investment.
Thus, the net value of an investment is crucial in evaluating how a fund performs daily. However, it must be noted that this does not reflect the profitability of a mutual fund. Hence, before investing in a mutual fund, investors should make it a point to look at its current cost and previous performance.
Difference Between Net Asset Value and Mutual Fund Market Price
The NAV of mutual funds is nothing more than the mutual fund scheme’s book value. The same is entirely determined by the value of its assets, liabilities, or expenses, and the total number of units. Notably, in comparison, the market price of the mutual fund is that of the fund’s assets/securities. It is the price at which the fund’s securities are traded in the market. It should be noted that many micro and macroeconomic factors, and investors’ attitudes, tend to influence market prices. However, market changes have no direct impact on the mutual fund’s NAV value, while the value of the assets it holds might.
Factors to Consider Net Asset Value of Mutual Funds
Some things to consider while calculating the net asset value of mutual funds using the formula of NAV:
- The net asset value (NAV) of a mutual fund is determined after the market closes daily since transactions continue to occur while the market is open.
- The mutual fund house computes and declares the net asset value of mutual funds.
- The market might not affect the values of all assets, such as cash derivatives.
Net Asset Value Allotment for Different Investment Types
Here is the NAV allotment for types of investment:
- Lumpsum Investments
You should note that if you make a lump sum payout by cheque, you will not be assigned the same-day NAV since it will be released on a different date. Payments made via RTGS, UPI, NEFT, UPI, or banks that offer instant payment credit can get credited to AMC’s account immediately. If there is a market crash and one wants to buy more units on a given day, one should make sure the money electronically transferred reaches the AMC’s account before the set cut-off time.
- Systematic Investment Plans
For SIP payments, regardless of the payment modality, the net asset value will be assigned on the same day the payment is realised in AMC’s account. This may be dependent on financial settlement systems and also the automated mandates through which SIP payments are routed.
- Other Transactions
For New Fund Offers (NFO), regardless of the application or credit day amount, the net asset value (NAV) on the allocation date remains final. The pay-out cycle of the switch-out mutual fund will determine when the switch-in fund gets money for the switch transactions.
Based on these, investors should note that there is no such thing as a high NAV unless the same is being compared to another mutual fund. Since the mutual fund NAV helps gauge the past performance of a fund, it is an important metric that investors should check when looking for a mutual fund to add to their portfolio.
