Why it is Essential to Know the Role of NAV (Net Asset Value) in Mutual Funds?

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NAV (Net Asset Value)

What is NAV (Net Asset Value)?

Net Asset Value is the difference between the fund asset’s value and liability value. Asset value can be known with the help of the NAV (Net Asset Value). Funds having a higher value of NAV come in the category of popular funds and the funds having low NAV are less popular. Thus NAV is very important during the selection of a right mutual fund.

Calculation of NAV ( Net Asset Value): NAV can be calculated by using the NAV formula.

What is the NAV formula?

NAV asset value formula = Fund asset-fund liabilities/Number of the outstanding units

Thus we can say that the simple meaning of NAV is asset minus liability which is divided by the number of outstanding units.

Relevancy of NAV for the investors:  Most of the investors have this type of thinking that the fund with low amount is economical as compared to the one with high amount. But this type of assumption is wrong. Understanding of this thing will help you in the selection of mutual fund. Also, there is a lot of difference between NAV (Net Asset Value) and equity share price.

Benefits of analyzing NAV:

  • NAV helps in determining the level of risk.
  • By keeping a tab on the risk, it helps to ensure you about better risk management.

Calculation of NAV using NAV formula:

For instance, consider that the closing of yesterday’s market has Rs20lakh for each asset. It has Rs 5lakh of liabilities, Rs. 80000 Shares outstanding, and then the fund’s NAV can be calculated as:

NAV=(20,00,000-5,000,000)/80,000=Rs.15,00,000/80,000=Rs 18.75

Similarly, Ifthe closing of a market has Rs. 10lakh for each asset and the fund has Rs 5lakh of liabilities and Rs. 50,000 unit is outstanding. The NAV can be calculated by using the NAV formula:

NAV= (10, 00,000-5, 00,000)/50,000= Rs.10

A scheme with a higher value of NAV( Net Asset Value) can be considered as a goof scheme for investment.

Lower and higher NAV:

This is a misconception that the fund with a lower NAV is cheaper as compared to the fund having higher NAV. The value of NAV should not affect the decision of choosing a mutual fund. The selection process of the mutual fund must be dependent on the portfolio of the mutual fund, its team and also on the strategy followed by the mutual fund.

Misconceptions about Net asset value:  one of the misconceptions is that investors assume that the fund whose value is Rs15 is cheaper than the fund whose value is Rs20. A large number of the time the funds with an identical portfolio can have different NAV’s.  

Thus if you want to understand the working of mutual funds regularly then you must know about NAV (Net Asset Value). Also before making any investment in mutual funds, you need to take care of this thing that you must know the fund’s previous performance record and also about the team which works under those funds.