What is NAV? Net Asset Value

The Net Asset Value represents the market value per share for a particular mutual fund. 

Deduct the liabilities from total asset value and divide it by the number of shares to determine the price of each fund unit. Usually, the unit cost of mutual funds begin with Rs. 10 and increase as the asset under the funds grow. The more popular a mutual fund is, the higher is its NAV. The NAV is more relevant in case of open-end funds. 

The NAV Formula-

The net value of an asset = (Total asset – total liabilities)/ total outstanding shares.

It is difficult to determine the input by taking correct qualifying items under assets and liabilities to get an accurate net value of assets.

The NAV for Mutual Funds-

The calculation is based on the trading method and depends mainly on various assets and liabilities.

  • Assets-These include the cumulative market value of a particular fund’s investments, receivables, cash, cash equivalents and other accrued income. The market value is calculated at the end of each day, based on the closing price of the various securities included in the fund’s portfolio. These funds may include a percentage of capital in the form of liquid assets and cash as well as other items like interest payments, dividends, etc. 
  • Liabilities-Under this section, while computing NAV mutual funds include outstanding payments, money owed to the lenders, and other fees and charges that are owed to associated entities.

Mutual funds may also have foreign liabilities which can include shares for non-residents, payment pending to foreign conglomerates and various sale proceeds that are yet to be ousted. It can also include various accrued expenses including utilities, staff salaries, operating expenses, distribution, management expenses, etc.

Net Value of an Asset is Relevant for Investors-

Investors think that the net value of an asset is the same as the price of its equity share. But only the liquid assets of a company are included to determine the price of equity shares, whereas to calculate the NAV, the valuation of both liquid and non-liquid assets are considered. Total equity represents a company’s working capital, while the net value of an asset gives a company’s total monetary worth.

Calculation of Net Value of an asset-

There are two types of net asset value calculation.

1.Daily net valuation of assets: All the mutual fund investment companies evaluate the total worth of their portfolio daily after the stock market closes at 3:30 pm. The market reopens next day with the closing prices of the previous day. The fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day.

2.General calculation of the net value of assets: The general net value of assets is the price of its equity share and is given by the cumulative cost of individual shares, giving the market value of a particular asset and is subject to change as per market fluctuations.

The Role of NAV in the Performance of a Fund

Most investors think that funds with a lower net asset value are cheaper and hence better. The NAV calculation does not correlate with the fund’s performance. If a fund has a lower net value does not make it a good choice. 

The net value of an asset shows how the underlying assets have performed in the previous years. Investors should check the returns from their investments to make an informed decision.

The net value of an asset is useful when it comes to understanding how a fund performs every day and it does not indicate how lucrative a fund is. Thus, understanding NAV is an important task before taking any investment decision based on it.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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