Mutual Funds comprise of many terminologies which you should know about before diving into any mutual fund investment. One such term is NAV or Net Asset Value. NAV in mutual fund refers to the per-unit price of the fund in the market. On the basis of this price, you buy or sell mutual fund units. There are many things about NAV in mutual fund which you should have a clear idea about. In order to get through the basics of mutual fund NAV, the following are some of the frequently asked questions (FAQs) regarding the same.
What Is Net Asset Value or NAV?
Mutual Funds pool the money of investors and reinvest the same in the market for securities. For the purchase of these securities which are deemed as assets, investors are allotted mutual fund units. The NAV in the mutual fund is the per-unit value of each fund unit. In order to calculate NAV, the market value of the securities is computed along with the liabilities associated with them and the units in which they are distributed. Quantitatively, the NAV in a mutual fund would be total assets minus total liabilities. This would generate a per-unit value of the fund.
As the market value of assets or securities keeps changing on a regular basis, the mutual fund houses are required to keep updating about NAV to their investors.
What Does NAV Show To The Investors?
A higher NAV shows that the price of the units of a particular mutual fund is higher and therefore that particular fund is performing better. Though it alone should not be the criteria. An investor should also check the past performance of the fund house to know about its performance. Fewer units can be purchased if the price is high. Similarly, a lower NAV means that the fund unit price is lower and more units can be purchased at the same amount. However, it is not advisable to select a mutual fund solely on the basis of NAV.
What Is The Formula For NAV?
To calculate NAV in a mutual fund the formula is as follows
NAV = [Assets – (Liabilities + Expenses)] / Number of units
The assets include all sorts of securities and liabilities include the payable amount and various other expenses.
Are The Market Price And NAV Same?
No, they are not at all the same. Market price refers to the price of shares of companies that are put on the stock exchange. It is the price at which these shares can be bought and sold.
Mutual Funds, on the other hand, follow no such method of the stock exchange. Their units are bought on the basis of NAV which keeps changing with each day. It is the invested money in mutual funds that are reinvested in the stock market for the purchase or sale of securities. So only at the second step of mutual funds does the market price come to the play. Hence, to put it in simple words: first, you buy mutual fund units on the basis of NAV, and then those units are invested in the stock market on the basis of the market price.
What Are The Schemes To Be Considered In NAV?
There are basically three schemes in which NAV plays a somewhat different role. They are as follows:
Open-Ended Scheme
In this scheme, there is no fixed maturity period of the fund so that an investor can buy or sell units on the basis of NAV determined price. In the open-ended scheme, NAV plays a major role.
Close-Ended Scheme
In this scheme, there is a fixed maturity period of the funds and the investor can only make an investment during the initial days of the scheme’s subscription period. After this, the investor will be able to buy or sell only those units which have been issued to him. The market price in this scheme varies from the NAV due to various factors such as demand and supply.
Interval Scheme
This scheme is basically the hybrid of the other two schemes: open-ended and close-ended. In the interval scheme, units or securities can be traded on the stock exchange or sold at a price predetermined by NAV.
What Does A Negative NAV imply?
A negative NAV in mutual fund implies that the funds are performing badly in the sense that their liabilities are greater than their total assets.
Where Can You Get Full Information About NAV in mutual fund?
All the information regarding the NAV of a mutual fund can be found on the Asset Management Company’s (AMC) official website.
At What Time Is NAV Updated?
NAV is regularly updated after 3.30 PM when the market closes for the day.
With these FAQs about NAV, you can better understand the nuances of the mutual fund as they are guided by NAV. NAV in mutual fund plays an important role where the NAV determined price reflects how many units you are in the capacity of buying. Though it is not the only criteria for the purchasing of best mutual fund units, NAV is surely one of the most important among them.
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