All You Need to Know About Mutual Fund NAV

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  • 27 Jan 2023
All You Need to Know About Mutual Fund NAV

When we buy anything, one of the first things we check is the price. The same applies to investments, whether you are buying insurance, stocks, or mutual funds, we evaluate its cost, performance, and then decide. Net asset value or NAV is one of the main elements considered while investing in mutual funds. Let’s know more about mutual fund NAV, what it signifies, and how it is calculated.

NAV or Net Asset Value is the market value of all the underlying securities in a mutual fund scheme divided by the total number of units. In simple terms, net asset value is the price you pay for one unit of a mutual fund. For example, if you invest INR 1,00,000 in a mutual fund scheme that’s NAV (net asset value) is INR 100, you would be given 1,000 units. We all know that a mutual fund is an investment vehicle that pools the money from investors of similar interest and invests the corpus in various securities such as stocks, bonds, and money market instruments. When you invest in mutual funds, fund units are given to you, and the value of each unit represents the net asset value of the fund. As mutual funds are professionally managed, fund management charges and other administration charges are proportionately charged against the assets of the mutual fund scheme and are adjusted in the fund’s net asset value. Unlike stock prices that keep fluctuating throughout the trading hour, mutual fund net asset value is published daily based on the closing price of underlying securities. Here is how the net asset value of a mutual fund is calculated:

  • Net Asset Value = (Total assets – Total liabilities and expenses) / Number of outstanding units.

Assets of the mutual fund include both securities and liquid cash. Equity instruments, bonds, debentures, commercial papers, corporate deposits, and other money market instruments are included as the securities while calculating the net asset value of a mutual fund scheme. Depending on the type of mutual fund you invest in, mutual fund houses are mandatorily required to disclose the NAV of the mutual fund scheme daily or weekly. For example, if you invest in open-ended mutual funds, NAV is published daily on all working days, and closed-ended funds disclose NAV weekly.

As an investor, you cannot just be focused on net asset value and invest in a mutual fund with lower net asset value expecting maximum growth. Irrespective of higher/lower net asset value, the fund may perform well based on many other factors. NAV is not the only factor to be considered while investing in mutual fund schemes, as it does not reflect the prospect of that particular fund. Many other details attached to the mutual fund, such as the size of assets under management, the fund’s historical performance, expense ratio, sectors it invests in, the degree of risk, and the fund manager’s track record, etc. needs to be considered to arrive at the rational investment decision.

It is essential to know how the mutual fund net asset value concept works to make an informed investment decision. Investment decisions should be based on your financial goals, time horizon, and risk tolerance level instead of considering just the price factor of an investment product.

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