Net Asset Value (NAV)
NAV in a mutual fund looks easy but complex in calculation. Most of the investors do not understand what is NAV and its impact on the mutual funds.
Calculation of NAV
Mutual fund assets usually fall under two categories – securities & cash. Securities, here, include both bonds and stocks. Therefore, the total asset value of a fund will include its stocks, cash and bonds at market value. Dividends and interest accrued and liquid assets are also included in total assets. Also, liabilities like money owed to creditors, and other expenses accrued are also included. Now the formula is:
Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units)
Assets = Market value of mutual fund investments + Receivables + Accrued Income
Debts = Liabilities + Expenses (accrued)
The market value of the stocks & debentures is usually the closing price on the stock exchange where these are listed.
Misconception Regarding NAV
This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100. However, this perception is totally wrong and investors would be much better off once they appreciate this fact. Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial. Why people carry this perception is because they assume that the NAV of a MF is similar to the market price of an equity share. This, however, is not true.