Table of Contents
Introduction
Investors often focus on a mutual fund’s past performance. Yet, they frequently ignore a key question: Will it perform well in the future? In this guide, we’ll explain Net Asset Value (NAV) and show why it matters when evaluating mutual funds beyond historical returns.
What is Net Asset Value and why it's important?
NAV represents the price per share of a mutual fund. Fund managers calculate it by subtracting liabilities from total investment value and dividing by available shares.
NAV matters because it shows you the exact price to buy or sell a share. Additionally, it reflects the fund’s overall performance. As investments grow, consequently, the NAV increases too. By understanding NAV, you can therefore make smarter decisions about mutual fund investments.
Most mutual funds start with a NAV of Rs. 10. Hence, a higher NAV indicates growth over time.
How is NAV calculated?
Mutual fund companies use specific formulas that consider holdings and liabilities. They calculate NAV in two main ways:
- Daily NAV Calculation: This happens after market close, around 3:30 pm. First, the fund company determines the market value of all securities. Then, they subtract liabilities and expenses. Finally, they divide by total outstanding shares. The formula looks like this:
NAV = [Assets – (Liabilities + Expenses)] / Outstanding units - General NAV Concept: Simply put, NAV reflects the total value of all investments minus liabilities, divided by total shares. This represents one share’s net value. Consequently, a higher NAV means each share has more value.
What is the Net Value of Assets for Mutual Funds?
NAV serves as a crucial metric in fund evaluation. Fund managers calculate it by subtracting total liabilities from total assets, then dividing by outstanding shares. This calculation determines the per-share value and shows the fund’s worth to investors.
Mathematically, NAV is expressed as:
NAV = (Total Value of Assets − Total Value of Liabilities) / Total Number of Outstanding Shares
Total assets include all fund investments: stocks, bonds, cash, and other securities. Meanwhile, liabilities include expenses, fees, taxes, and other obligations.
Mutual Fund companies compute NAV daily, typically at trading day end. They use closing prices of underlying securities. As a result, NAV provides the foundation for share pricing, offering transparency about the fund’s value.
The Role of NAV
NAV provides critical information for mutual fund investors. Here’s how investors and managers use NAV:
- Valuation: NAV shows the fund’s total worth based on current market values of all holdings.
- Buying and Selling: You pay the end-of-day NAV plus any fees when buying shares. Similarly, you receive NAV-based payment when selling.
- Performance Tracking: NAV changes reflect fund performance over time. A rising NAV indicates increasing investment values. Conversely, a falling NAV suggests decreasing values.
- Expense Calculation: Fund managers deduct running costs from assets, which lowers the NAV. The expense ratio shows total expenses as a percentage of average net assets.
- Dividend Payouts: The fund bases dividend amounts on NAV. Most funds distribute these quarterly or annually, depending on their policies.
- Portfolio Management: Managers monitor NAV to track asset allocation. Sometimes, NAV changes prompt them to rebalance the portfolio by buying or selling securities.
Conclusion
Understanding NAV helps you move beyond simply reviewing past performance. Moreover, it provides a key metric for making informed investment decisions. Consider NAV alongside historical returns, expense ratios, and your risk tolerance. This approach helps you assess a fund’s current value and its fit with your financial goals.
Remember, NAV shows the fund’s worth on a specific day. While past results don’t guarantee future performance, understanding NAV equips you to navigate mutual fund investing more strategically. As a result, you can make better choices for your financial future.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.