Net Asset Value(NAV)

What is NAV?

The Net Asset Value represents the market value per share for a particular mutual fund. It is calculated by deducting the liabilities from total asset value divided by the number of shares. One needs to gather the market value of a portfolio and divide it by the total current fund unit number to determine the price of each fund unit.

Most of the time, the unit cost of mutual funds begin with Rs. 10 and increase as the asset under the funds grow. Going by this rule, the more popular a mutual fund is, the higher is its NAV.

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The net value of an asset is most commonly used in case of open-end funds. With these investments, the interest and shares do not get traded between shareholders. NAV helps determine which investment one might choose to withdraw or keep in their investment portfolio by providing a reference value.

What is the Net Asset Value Formula?

The calculation of the net value is pretty straightforward. One can easily do it by using the formula below –

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

However, it is crucial to input the correct qualifying items under assets and liabilities to get an accurate net value of assets.

What is the Net Value of Assets for Mutual Funds?

Mutual funds, unlike stocks, do not trade in real-time. Instead, they are calculated based on the trading method and depends primarily on various assets and liabilities.

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  • Assets

The asset section of mutual funds includes the cumulative market value of a particular fund’s investments, receivables, cash, cash equivalents and other accrued income. This 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. The sum of all these assets mentioned above or their variants falls under the category of assets.

  • Liabilities

The liabilities section, while computing net asset value mutual funds include outstanding payments, money owed to the lenders, and other fees and charges that are owed to associated entities.

Apart from these, 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.

Liabilities can also include various accrued expenses including utilities, staff salaries, operating expenses, distribution, management expenses, etc.

Thus, for net asset value calculation for mutual funds, the quantum of the above mentioned liabilities and assets as of the end of a particular day are taken into account.

How is the Net Value of an Asset Relevant for Investors?

Most investors perceive the net value of an asset to be the same as the price of its equity share. However, the calculation differs from each other, as 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 taken into account. Thus, total equity represents a company’s working capital, while the net value of an asset gives a company’s total monetary worth. Therefore, net value of an asset is necessary to make proper decisions about the funds an investor choose to invest in.

How is the Net Value of an Asset Calculated?

There are two types of net asset value calculation. These are –

  • 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 the day after 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, using the formula mentioned above.

  • 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. This calculation gives 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 believe the net value of an asset is the same as its stock price. Thus, they tend to think that funds with a lower net asset value are cheaper and consequently better investments. However, the net asset value calculation does not correlate with the fund’s performance. Just because a fund has a lower net value does not make it a comprehensive investment.

The net value of an asset merely illustrates how the underlying assets have performed in the previous years. Therefore, investors should not make it a deciding parameter while choosing funds to invest in. They should check the returns from their investments to make an informed decision.

Thus, the net value of an asset is useful when it comes to understanding how a fund performs every day. It does not indicate how lucrative a fund is. Therefore, investors should check the current cost of funds and its historical performance before choosing to invest in it.


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