Must Knows

NAV meaning, calculation and usage

[ecis2016.org] Here’s all about NAV, which refers to Net Asset Value. Read on to know about NAV calculation and the various benefits for investors.

The Net Asset Value (NAV) of a mutual fund scheme refers to the market value of all the securities held by it. The NAV of a mutual fund scheme is used to assess its performance. The NAV per unit of a mutual fund is computed by dividing the market value of the mutual fund scheme’s securities by the total number of units in the mutual fund scheme.

Difference between NAV and Market price

The NAV pricing system used to trade mutual fund shares differs greatly from the common stocks or equities issued by firms and traded on a stock exchange. 

Through an initial public offering (IPO) and maybe subsequent supplemental offers, a company issues a limited number of equity shares, which are subsequently traded on markets such as the New York Stock Exchange (NYSE). Stock prices are determined by market forces, or supply and demand for shares. Stocks’ value or pricing is purely determined by market demand.

A mutual fund’s value is defined by the amount of money invested in it, its operating costs and outstanding shares. However, the fund’s NAV does not include a performance statistic. The NAV of a mutual fund is largely unimportant in measuring a fund’s performance because mutual funds distribute practically all its income and realised capital gains to fund shareholders. Instead, a mutual fund’s total return, which incorporates the performance of the underlying securities and paid dividends, is the ideal metric to use.

NAV: Calculation

General calculation

To calculate NAV, divide the entire value of all cash and securities in a fund’s portfolio, minus any liabilities, by the number of outstanding shares.

The NAV computation is crucial since it determines the worth of one fund share.

A fund’s actual market value may differ slightly from its NAV, indicating a potential buying or selling opportunity.

NAV calculation on a daily basis

All mutual funds calculate the market value of the securities after the market hours. Using the aforementioned formula, the mutual fund house subtracts all existing liabilities and expenses to arrive at the day’s net asset value (NAV).

Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units 

The assets of a mutual fund scheme are divided between securities and liquid cash. Securities include market instruments like equities, debentures, bonds, commercial paper, etc.

All liabilities and expenditures associated with operating the fund are deducted by the fund management. You can determine the NAV by dividing the total value of cash and securities in a mutual fund’s portfolio minus required obligations, then dividing by the total number of outstanding units.

NAV: Investment-timing impact

Beginning February 1, 2021, you will get the applicable NAV, subject only to the availability and realisation of money in the AMC’s bank account before the appropriate cut-off timings for purchase transactions. However, you should be aware that inter-bank transfer delays may result in funds not arriving at the AMC until the next business day.

The NAV cut-off times for subscription and redemption of all mutual fund schemes have been restored by SEBI to 3 p.m. It applies to all mutual fund schemes regardless of investment quantities. However, these requirements do not apply to liquid and overnight money for programmes valued at more than Rs 2 lakh. The subscription deadline for liquid and overnight schemes is 1:30 p.m. on the corresponding business day. The redemption or sale deadline for these mutual fund units is 3 p.m.

Transaction types Whether the transaction was completed before the deadline If the plan got the money before the deadline NAV applicable 
Purchase and SIP investment  Yes Yes Same day’s NAV.
Yes No The scheme’s NAV on the business day it receives the funds before the cut-off time.
No Yes NAV of the business day before the cut-off on which the time stamping is performed.
No No The scheme’s NAV on the business day it receives the money before 3 p.m.

NAV: Role in fund performance

Many investors believe that net asset value is comparable to the price of a stock. They feel a fund with a lower net asset value is less expensive and thus a better investment. A lower valuation does not necessarily imply a better investment and vice versa. As a result, it should not be the sole criterion for selecting a mutual fund.

NAV: Benefits for investors

Mutual fund NAV is the price at which you can buy or sell units of a mutual fund. There are many more parameters that you should consider while selecting the right mutual fund schemes. A low NAV value might be because of the bad timing of a particular scheme. A good quality mutual fund should perform well in good and bad markets. It is better to look at the track record of performance and the risk profile of a mutual fund scheme.

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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