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What is NAV in Mutual Funds?

Mutual fund investment is one of the best instruments throughout the world for creating wealth. The various features such as liquidity and diversification. These feature attract investors towards Mutual Funds. In the previous article, we have described Mutual Funds and ETFs. Before starting an investment, it is important to know some key technical concepts of Mutual Funds. This NAV in Mutual Funds, its calculation, and the factors influencing NAV will help you understand its significance. Before understanding NAV, see the concept of Mutual Funds. Mutual Funds pool money from different investors and invest it in stocks, bonds, securities, etc. 

• What Is NAV?

NAV: Its full form is Net asset value. For mutual funds, NAV represents the per-share value of the fund and is calculated by taking the total value of the fund's assets (such as Stocks, Bonds, and Cash) and subtracting any liabilities (such as Fees or Debts), then dividing by the total number of shares outstanding shares or units. 

Let’s say there's a mutual fund in India with the following assets and liabilities:

1. Cash: 50,00,000 Rs.

2. Stocks: 1,00,00,000 Rs.

3. Bonds: 25,00,000 Rs.

4. Liabilities:25,00,000 Rs.

NAV= (total asset-liabilities) / no of units or shares

The total value of these assets is: 50,00,000 + 1,00,00,000 + 25,00,000 = 1,75,00,000 Rs.

Now, assume the mutual fund has issued 10,000 units (or shares).

To calculate the NAV:

NAV = Total Value of Assets – Liabilities  ÷ Number of Units

NAV = (1,75,00,000 -25,00,000)÷ 10,000 = 1,500 Rs.

This means each unit of the mutual fund is worth 1500 Rs.

So, the NAV helps investors understand how much each unit of the fund is worth at any given point. If the NAV increases over time, the value of your investment goes up. If it decreases, your investment value goes down.

What are the meanings of Assets, Liabilities, and Total units or outstanding shares?

Asset: It is the sum of all the assets held by mutual funds. 

Examples: Stocks, Bonds, Securities, Real Estate, etc.

Liabilities: Liabilities of the mutual fund mean outgoing money of the MF company which include all expenses, debt, pending payment, etc.

Total no of outstanding units or shares:

It refers to the number of shares or units held by all the investors.

• NAV in Open-end mutual funds and NAV in closed-end Mutual Funds :

• Role of NAV in Open-Ended Mutual Funds:

The most prevalent type of mutual fund is the open-ended mutual fund, which gives investors the flexibility to purchase and redeem units at the current NAV at any time. The NAV varies as per the value of assets within the fund. In an open-ended fund, the units have a variable number since the size can increase or decrease based on investor purchases or redemptions.

• Role of  NAV in Closed-End Mutual Fund:

Initially, unlike the open-ended funds where the number of units is flexible, the closed-ended funds have a fixed number of units. These units are created through an initial public offering (IPO). After the IPO, these units can be traded on the stock exchange at a price that can be above or below the NAV, depending upon demand and supply conditions. Here, NAV has a somewhat less direct role to play in the trading price of units.

• Factors Influencing NAV:

• 1. Capital Gains:

Capital gains i.e. profit after taxes and other expenditures received on investment of that mutual fund will impact that fund's NAV.

2. Market Performance:

The overall performance of the market will directly impact NAV.

Ex. Stock market performs well then it will help increase the NAV of the Equity fund or Index Fund.

3. Expenses and Fees:

High costs lead to an increase in liabilities Sudden expenses and unwanted fees directly harm the NAV.

• Conclusion:

Having an understanding of NAV is very important for investors. It works as like a indicator for investors, and it helps investors to compare the performance of different mutual funds accurately. A higher NAV shows the size of a mutual fund, but it does not mean that a higher NAV means a higher return. Return on investment depends on various parameters, fund manager decisions, market sentiment, and other multiple factors important for growing investment. The main role of NAV is to indicate the best mutual fund where the asset is more than liabilities.

• FAQ:

1. How does NAV Increase or Decrease?

Ans: NAV increases when the value of the fund’s assets (Stocks, Bonds, etc.) rises or when it generates income, and it decreases when asset values fall or the fund incurs higher expenses and liabilities. It’s a daily reflection of the fund’s overall market performance.

2. What is a good NAV for Mutual Funds?

Ans: NAV (Net Asset Value) itself doesn't determine a fund's quality. Instead, of focusing on a higher NAV, focus on the fund's historical performance, expense ratio, and alignment with your investment goals. Evaluate overall performance and consistency rather than just the NAV.

3. What is the Net Asset of Mutual Funds?

Net assets of mutual funds include investments in various Stocks, Bonds, Securities, Capital Gain, etc.

4. What is the Role of NAV in Mutual Funds?

Ans: The Net Asset Value (NAV) in mutual funds is essential for determining the per-share value, setting the buying and selling price of shares, and tracking investment performance. Understanding NAV helps investors make informed decisions about their mutual fund investments.

5. How do I know the NAV of my Mutual Fund?

Ans: You can check on your mutual fund investment website, it is calculated by subtracting the total liabilities of the fund from the total assets of the fund and dividing the result by the total outstanding unit or share.

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