What is a Mutual Fund’s NAV?

The NAV, which stands for Net Asset Value of a mutual fund, is the price per fund unit which determines its overall cost. It represents the fund’s market value per share and is crucial to know when one chooses to invest in a mutual fund. Net Asset Value is the price at which the investors buy the fund shares of a fund company at the bid price and sold at a redemption price to the fund house. NAV is derived by calculating the sum value of cash and securities in the fund’s portfolio, less any liabilities, and dividing it by the current fund units. At the end of each trading day, the NAV is computed based on the closing market prices that day of the fund portfolio’s securities.

For example, if a fund has 10million worth assets and liabilities worth 1million, then it would have a total value of 9million.

In the words of Joe Allaria, CFP of CarsonAllaria Wealth Management, Illinois, “The NAV is simply the price per share of the mutual fund. It will not change throughout the day like a stock price. It updates at the end of each trading day. So, a listed NAV price is the price as of yesterday’s close.”

How is NAV calculated?

All mutual fund companies estimate their portfolio’s worth once the stock market closes at 3:30 pm each day. The market opens the next day with the previous day’s closing share prices. The fund house then deducts every payable and daily expense accordingly to come up with the Net Asset Value for the day using this formula –

Net Asset Value = [Assets – (Liabilities + Expenses)]/Outstanding Units

How does investment timing affect the fund’s NAV?

Calculating NAV during market hours are impossible as the stock prices change every minute. Hence, it keeps a strict deadline for all its investments, which is usually 2 pm. If one invests before this, one gets access to the fund units on that day’s NAV. Otherwise, the groups go to the NAV allotted for the next business day.

What relevance does NAV have for investors?

While one may buy and sell mutual fund units at NAV, one must remember not to confuse this with the stock’s market price. As it indicates the market value of the fund units, hence it does help an investor keep track of the overall performance of the mutual fund. One can calculate the actual increase in the value of their investment by determining the percentage increase in the mutual fund’s Net Asset Value. NAV, therefore, accurately depicts the performance of the mutual fund.

However, it is not wise for investors to base their investment decision solely on the NAV of a scheme. The investors only decide the stock price, depending on the fundamentals of the company, prospects of the company et cetera. It implies that the market price can be different than the book value of the stock. As NAV is the total value of the portfolio held by the mutual fund, reflecting its investments minus liabilities, it is not decided by the investors. 

Comparing the NAV of two mutual fund schemes does not reveal any information about their prospects. A higher NAV suggests that the scheme’s investments have fared well or it has been around for a longer time. So the NAV only impacts the number of units one may get. A scheme with NAV may give one fewer fund units, but the value of investment remains the same. It is the performance and returns generated by the mutual fund that matters, and that’s what must be closely speculated by the investor before making an investment decision.

Record Date v/s Ex-Dividend Date -What is the Difference?

What is record date?

Record date, also known as the date of record, is a cut-off date or a particular date fixed by the company to determine the eligibility of its shareholders. On this date, the investors must own the shares of the company so that they become eligible to participate in all company matters such as receiving the dividend, bonus, share spilt, etc.

What is ex-dividend date?

The ex-dividend date, also known as the ex-date is the first trading day, where the value of the next dividend payment is not included in the price of the stock. The buyers must purchase the stock before the ex-dividend date to receive the next dividend payment. If you buy the stocks on or after the ex-dividend date, then you are not entitled to the dividend payment.

Difference between the record date and the ex-dividend date

  • The board of directors of the company decides the record date of a stock whereas the ex-dividend date is decided according to the stock exchange rules.
  • The record date or the date of record comes after the ex-dividend date or ex-date. The ex-dividend date is generally one business day before the date of record.
  • The record date is the date fixed by the company in order to determine the eligibility of the shareholders of the company. Buyers buying stocks on the day of record will not receive the next dividend payment of the company. They must buy stocks before the day of record to become eligible shareholders of the company. However, the ex-dividend date is the first day, when the trading of the stock begins. In order to receive the dividend payment, stocks should be bought before the ex-dividend date. Stock bought on and after the ex-day results into entitlement of dividend payment to the seller and not the buyer.
  • The date of record is of not much significance to the investors. It is less important to the investors than the ex-dividend date. On the other hand, the ex-dividend date has greater importance for managing the portfolio.
  • Shares that are owned on the date of record has the eligibility for getting distributions. However, shares that are purchased on or after the ex-dividend date are not eligible to get distributions.

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