For those of you who have invested or are going to invest in mutual funds, the words net asset value’ or NAV’ should be familiar. It is one of the first words that any new investor learns, but it is also one of those words which is least understood by most investors. It might seem like typical investment jargon, but its meaning is quite simple. Read on to know more about the net asset value of funds, how it is calculated and how it affects your mutual fund investment.
New investors eagerly read anything they can get their hands on. But the problem is usually that articles tend to be written in jargon which they are not used to. So here is a simple break down of the most basic aspect of investment the net asset value. The words are something that you’ll hear frequently whenever discussion of funds comes up, so you’d best understand it to move ahead with your investments. Every mutual fund’s portfolio has a net asset value or NAV. This is because the NAV of a mutual fund tells you what the cost of a share in the fund is. It is basically a calculation of the worth of each individual share in the fund. Usually NAVs are calculated by the fund. If the fund doesn’t calculate the NAV itself, then it hires accounting firms for the purpose. Either way, the investor doesn’t need to be bothered with the NAV other than what it represents for his share of investment.
But while you may not have to undertake the calculations yourself, it is best to understand how it is done so that you know what is included in the value and what is deducted. The NAV is the total market value of all the assets that portfolio has after liabilities have been deducted, and the resulting number is divided by the number of outstanding units. That is how NAV is derived. We can understand this by way of an extremely simple example. Let’s say you invest in a fund with Rs. 100/- and purchase 100 units at Re. 1/- each. At investment, the corpus of the fund was Rs. 100/-, presuming that you were the only one investing. The corpus grows after a while to Rs. 200/-. Now, to calculate NAV we deduct the asset Rs. 200 from debt which, for simplicity, we assume is 0. We get the result 200. So now, we divide 200 by the number of outstanding units which is 100. We get the answer 2’. So the price of each share of the fund is now worth Rs. 2/-.
This calculation doesn’t take into account multiple other investors, or even the many deductions that will be taken into account. Some deductions are debts owed by the fund, the expense ratio of the fund and so on. Remember that NAVs are declared once a day, usually at the end of day. This is because NAVs tend to fluctuate from minute to minute while the market is in full flow. You may not need to use this calculation every single day, but it never hurts to know how the result is arrived at.
