Mutual funds are just one easy and low-risk path toward the stock market and high-value returns investments. It is a great way to get started for anyone who wants to see a good amount of returns from the stock market. But there are just a few things that revolve around mutual funds, and you can’t let them go because they are quite essential.
This article is going to be telling you about NAV.
So, what is NAV? Let’s find out.
What is the Meaning of NAV?
To grasp the concept of net asset value, keep in mind that all mutual funds in India are purchased and sold in the form of units, similar to individual shares. NAV, or net asset value of the mutual fund, is the price of each unit of a fund. In this approach, NAV serves as the foundation for mutual fund investing.
Since mutual funds invest in a range of stocks and bonds, the value of the scheme’s investments can fluctuate on a daily basis. As a result, the NAV of mutual funds fluctuates on a daily basis, just like stock prices.
Yet, there is one significant difference between mutual fund NAV and shares. The NAV of a mutual fund plan is calculated at the end of each day of trade. Hence the NAV changes just once every day. Equity share prices, on the other hand, fluctuate in real-time as shares are traded during market hours.
Relationship Between NAV and Mutual Funds
Many investors confuse a mutual fund’s NAV with the market price of a stock. As a result, while investing in mutual funds, they believe that a lower NAV indicates a lower price and, thus, a better investment. Let us examine why this is an incorrect assumption.
- When a corporation is listed on the stock exchange, its shares become available for purchase by investors. The price of the company’s stock is listed on the stock exchange. That is the share price on the stock exchange.
- The price of the company’s shares is affected by factors such as the demand-supply environment and the company’s potential. As a result, the stock market price differs from the book value.
- There is no such thing as a market price for mutual funds. We purchase mutual fund shares at their book value. A mutual fund’s NAV is hence the book value of the unit. As a result, the market price of a company’s shares differs greatly from the NAV of a mutual fund.
NAV Indications
Some distributors market new fund offerings by emphasizing their low NAV. They mislead investors into believing that purchasing a mutual fund with a low NAV represents a good value. This is because investors mistake the NAV of a mutual fund for the price of a company’s stock.
A low stock price indicates that the stock is offered at a low cost. As previously stated, the same does not apply to the NAV of a mutual fund. The NAV of a fund does not indicate how expensive or inexpensive it is.
The NAV simply indicates the current value of a mutual fund scheme per unit. A high NAV may only indicate a mutual fund scheme’s favorable performance. It also implies that the system has been around for quite some time.
NAV has no bearing on the number of units you obtain. A high NAV mutual fund scheme gives you fewer units, but the value of your investment remains the same. What counts is the mutual fund’s performance and the returns you receive.
NAV Reports
While NAV is calculated and displayed as of a certain business date, all mutual fund buy and sell orders are handled based on the cutoff tenure at the NAV of the trade date.
If authorities demand a 1:30 p.m. cutoff period, then buy and sell orders received before that time will be executed at the NAV on that date. Any orders submitted after the cutoff time will be handled using the next business day’s NAV.
How to Calculate NAV?
The NAV of mutual funds is calculated using the following formula:
NAV = (Total Assets – Total Liabilities) / Total Units Outstanding
Or
NAV = (Mutual Fund Net Assets) / Total number of outstanding units
The total number of outstanding units in the following NAV calculation method is the sum of all units delivered by the mutual fund to all of its investors. Because the NAV calculation formula employs a mutual fund’s entire assets and total liabilities at the end of each day, the net asset value of mutual funds only changes once per day.
Conclusion
The net asset value of an investment fund is the net value of its assets, less its liabilities, divided by the amount of shares outstanding. Funds can be opened or closed, and the price of each share is determined by the NAV. The NAVPS, or per-share value, reflects the price of each fund share. Now you might know the reason that you have to know this.
