What is NAV?
As in the case of shares, their cost is determined by the share prices prevailing in the market. Similarly, in the case of Mutual Funds, the prices are determined as NAV(Net Asset Value).
It is calculated every day after the closing of the market. So the main aim behind this regular calculation is to estimate the price at which the mutual funds can be purchased or sold at the fund house.
Now, what is Fund house?
As for trading in shares, there is a stock market. Similarly to trading in mutual funds, there is a fund house.
Let’s give you a smooth way to understand NAV in Mutual Funds.
How is it relevant to investors?
NAV(Net Asset Value) in mutual funds just gives a rough idea about the past performance of the mutual fund, but it is not of much relevance for future estimation; it just represents the growth with the increase in the NAV value at the end of the trading time of the day which is around 3:30 pm.
So, NAV cannot be considered the only basis for making an investment decision in the case of mutual funds. There are various other factors like liquidity, risk appetite, and many more that we have already discussed in the previous blog.
Now you all must be thinking, Can we calculate it on our own?
So the answer is yes.
How is NAV calculated?
Let us look at the NAV formula, Don’t worry. It is just an addition, subtraction, and division.
To calculate NAV in Mutual funds, firstly, you need to add all the Assets and subtract liabilities from them, their result divided by the number of outstanding units.
NAV Formula:
NAV= (Assets – liabilities)/ Number of outstanding units.
(Securities, bonds, equities, and other options of Mutual Funds – the expenses incurred to manage these funds)/ Total number of units of Mutual funds issued so far.
How is NAV different from the Market Price?
Market Price refers to the price at which shares in the fund can be bought or sold during trading hours, whereas NAV (Net Asset Value) represents the value of each share of the fund’s assets and cash at the end of the trading day.
The market price of the fund is determined based on supply and demand. In contrast, the NAV of any fund is calculated by adding the value of all assets in the fund, deducting liabilities, and dividing it by the number of outstanding shares.
What is the impact of NAV on fund performance?
Until now, we read that NAV in Mutual Funds shows the daily performance level after the closing hours. So now, let’s see how it is relevant to investors’ decision-making and whether the lower NAV in Mutual Funds is good or bad.
If the value of NAV is lesser, then it should not be interpreted as a cheaper investment option because NAV alone is not an indicator of the performance of funds, as it shows just the past performances. So, when making a decision, consider other factors that affect investments.
Conclusion
The NAV(Net Asset Value) in a Mutual Fund fund is more helpful in determining how the fund performs consistently.
Before investing, consider the fund’s current cost and historical performance, among other factors. And once you get familiar with these all, you can start investing for free with Shoonya to learn and earn at the same time.