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.

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