Net Asset Value (NAV)

What Exactly is Nav?

NAV or Net Asset Value basically represents the per unit market value of a respective fund. In other words, NAV also means the bid price at which an investor buys from a mutual fund company and/or the redemption price at which the funds are sold back to the mutual fund company. It can be easily calculated by dividing the cumulative value of all the assets in a portfolio minus all its liabilities by the total number of outstanding units within the respective portfolio. Nevertheless, real time computation NAV is indeed a tricky thing. It is calculated once at the end of each trading day taking into account, the market price of the underlying portfolio at the time of closing.

How Does Nav Of A Fund Impact The Investor?

The NAV of any mutual fund is significantly different from that of a generalized stock offered by a company enlisted on a stock exchange. This is because, companies enlisted on a stock exchange only offer a definitive number of shares through IPO (Initial Public Offering) and other successive offerings. This makes the NAV of such a stock is also determined by the experts’ analysis of the respective company’s future performance and the demand-to-supply scenario, thus making the NAV of the respective stock vary from that of its book price. However, when mutual funds are considered, the companies issuing the funds virtually distribute all their capital gains directly amongst the funds’ shareholders, thus making no difference at all in the book price and the NAV of a respective mutual fund.

In other words, the NAV for mutual funds should not be a subject for consideration when it comes to the funds’ performance. However, the NAV must definitely be taken into account when considering the number of units to be bought. Let’s take an example:-

Assume that you’re investing upon two mutual fund schemes, namely A & B with NAVs 20 and 50 respectively. You invest INR 50,000 on each set of funds. Therefore, you get 2,500 units for scheme A and 1,000 units for scheme B. Assume that both the schemes fetch you 20% returns after the first month. So, now the NAV for scheme A will be INR 24 and that of scheme B will be 36 which means that the NAV of scheme A is lesser than that of scheme B, however, both the schemes fetch equal returns within the same time. Considering this example, it can be very clearly stated that the NAV of a mutual fund stays irrelevant unless the number of units are brought into account.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not an indicator of future returns. Wealth Redefine is a AMFI registered Mutual Fund distributor – ARN - 85350

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