While buying stocks, you are concerned with the price of a single share. Similarly, investors are concerned with the NAV while investing in mutual funds. It is essential to understand what NAV is in mutual funds before making an investment decision. Without understanding NAV, you might not know the per-unit price of mutual funds. Let us discuss what net asset value in mutual funds is to help you make informed decisions.
Topics Covered
- Net Asset Value in Brief
- How is NAV Calculated?
- Understanding of How NAV Works
- What is a Good NAV for a Mutual Fund?
- How is the Net Value of an Asset Relevant for Investors?
- Role of NAV in the Performance of a Fund
- Invest in Mutual Funds with Religare Broking
- In a Nutshell
Net Asset Value in Brief
A mutual fund invests in a wide range of securities to offer high returns to investors. Mutual fund schemes come with units. There are many units of a mutual fund sold to different investors. Mutual fund companies predetermine the number of units in a fund. Only the predetermined units are sold to different investors. NAV determines the per-unit price of a mutual fund for investors.
You invest in a mutual fund by purchasing its units. The NAV of a mutual fund depends on the value of underlying securities. Since NAV depends on the underlying securities, it might change with time. The NAV of a mutual fund is computed daily based on the current price of underlying securities. The mutual fund provider may also make a few adjustments to the NAV.
How is NAV Calculated?
NAV is calculated based on the total worth of the underlying securities. Let us understand how to calculate NAV with an example. Let us say that a mutual fund has invested in 1,000 company shares worth Rs 20 each. The mutual fund also invests in 500 shares of another company worth Rs 100 each. The mutual fund portfolio also consists of government bonds worth Rs 50,000.
In the above example, the total value of the mutual fund portfolio is 1,20,000 (20,000 + 50,000 + 50,000). Let us say the mutual fund has 1000 units available for investors. In such a case, the per unit price of the mutual fund will be:
NAV = Total value of the portfolio / Total number of units
NAV = 1,20,000 / 1000
NAV = Rs. 120 (for the above example)
It means you will spend Rs. 120 to buy a single mutual fund unit. This per-unit price of the mutual fund is also its NAV.
Understanding of How NAV Works
Now that you understand what NAV in mutual funds is and how to calculate it, let us discuss how it works. The functioning of NAV depends on the price of underlying securities. The price of mutual fund securities like stocks change on a daily basis. It means the total value of the mutual fund portfolio also changes daily. For the same rationale, the NAV of a mutual fund is subject to change. Mutual fund companies and fund managers announce the NAV daily. It represents the price to buy or sell mutual fund units.
Let us understand how it works with an example. For instance, say that the total value of a mutual fund is 5,00,000, and it has issued 1,000 units to investors. In such a case, the NAV for the mutual fund will be Rs 500. After a week, the price of securities drops, and the total value of the mutual fund becomes 4,00,000. In this case, the NAV for the same mutual fund will be Rs 400. You can say that NAV depends on market conditions, fund performance, and price changes.
What is a Good NAV for a Mutual Fund?
When the per-unit price of a mutual fund is high, it means the fund has performed well in the past. The underlying securities have grown in value, thus increasing the NAV. However, new investors might not have ample funds to invest in a mutual fund with a high NAV. In such a case, an affordable and stable mutual fund will a low NAV is a good option. Ensure that you choose a mutual fund that has room for growth.
How is the Net Value of an Asset Relevant for Investors?
NAV will determine how many units you can purchase for a particular investment amount. NAV also determines the affordability when investing in mutual funds. Besides knowing what NAV is in mutual funds, investors must also analyse the fund’s historical performance, market conditions, and other factors.
Role of NAV in the Performance of a Fund
NAV is directly related to the performance of a mutual fund. Some investors think a mutual fund with cheap units is the best option. The NAV might be lower because of non-performing securities in the mutual fund. Instead of checking the current NAV, investors must habitually analyse the NAV history. When the NAV of a mutual fund is dropping continuously, that means the fund is not performing up to expectations. On the other hand, a continuous rise in the NAV denotes the positive performance of a mutual fund. NAV also increases when the price of underlying securities in a fund increases.
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In a Nutshell
Understanding the Net Asset Value (NAV) is essential for making informed decisions when investing in mutual funds. The NAV represents the per-unit price of a mutual fund and is calculated based on the total value of its underlying securities. It fluctuates with market conditions, reflecting the fund’s performance. While a high NAV can indicate past success, analysing the NAV history and considering various factors is crucial.
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