Mutual funds are an attractive avenue for investing your surplus cash. They are affordable and they also promise good returns in the long run. Moreover, there are various types of mutual fund schemes which you can choose as per your risk preference. The growth of a mutual fund scheme is measured by the change in its Net Asset Value (NAV). NAV is a very important concept in mutual fund investments that should be understood if you are investing in a scheme. Do you know all about mutual fund NAV?
No? Let’s understand.
What is NAV?
NAV is the short form of Net Asset Value. NAV represents the ‘per unit’ cost of a mutual fund scheme. It is calculated as follows –
NAV = (total value of the mutual fund portfolio – liabilities and expenses of the scheme) / total number of units
Understanding Mutual Fund NAV
When you invest money in a mutual fund scheme, it is pooled together with the money invested by other investors. From this pooled investment, the expenses and liabilities are deducted to arrive at the net investments. This investment is, then, used by the fund manager to buy stocks, shares, bonds or securities of various companies and institutions. The different investment made by a mutual fund manager represents the total portfolio of a mutual fund scheme. This value is then divided by the total number of units purchased to arrive at the Net Asset Value (NAV).
Let’s understand with the help of an example –
- 100 investors contribute Rs.1000 towards a mutual fund scheme of the unit value of Rs 10/-.
- The total investment in the scheme becomes Rs.1000*100 = Rs.1 lakh with total MF units of 10,000
- Rs.5000 is the expense incurred by the mutual fund scheme
- The available investment amount, therefore, is Rs.95, 000
- The fund manager uses this money to buy
- 500 shares of ABC Limited priced at Rs.100 spending a total of Rs.50,000/-
- 75 bonds of XYZ limited priced at Rs.200 spending a total of Rs.15,000/-
- 200 units of MNC Limited priced at Rs.150 spending a total of Rs.30,000/-
- Total invested value of the scheme is Rs.95,000 against 10,000 units
- If the share value of the ABC Limited increases to Rs 100,000/-; net asset value of the MF portfolio will increase by Rs. 50,000 to Rs. 145,000/- (ie. Rs. 95,000/- + Rs. 50,000/-)
- Thus NAV will increase to Rs. 14.5/- (ie. Rs. 145,000 /10,000 units)
Important facts about NAV
- The NAV of a scheme is dynamic. It changes every day and is calculated at the end of each market day.
- The growth in the NAV rate depends on the underlying assets of the mutual fund scheme. If the market value of the assets increases, NAV rises and vice versa.
NAV and Mutual Fund Returns
NAV has no relation with the return generating a potential of a mutual fund scheme. As such, you should not compare two mutual fund schemes based on their NAVs. A scheme’s performance should be measured by its historical returns. Though a higher NAV would give lower units, the growth of the scheme does not depend on the number of units but the value of the underlying assets. So, don’t judge a scheme by its NAV.
Now that you have understood the concept of NAV, you may start your first investment in mutual Funds through Fintoo.
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