What is Net Asset Value (NAV)
NAV is calculated each day based on the closing prices of all the securities that the various mutual fund schemes own after making the necessary adjustments, unlike share prices, which fluctuate continuously during trading hours. The costs (also referred to as TER) of a mutual fund scheme, such as fund management, administration, distribution etc., are charged in proportion to the scheme's assets and are adjusted in the NAV.
NAV essentially serves as a representation of the fair value of a particular fund share. It gives investors a benchmark against which to compare any offers to purchase or sell fund shares.
A mutual fund scheme's daily variation in NAV reflects changes in the assets of the scheme. Financial advisors, however, advise investors that everyday variations in the scheme's NAV are irrelevant while choosing a mutual fund scheme for their investments. To evaluate a fund's success, investors should consider the annualized return of the fund over various time periods.
Difference between NAV and share price
For companies, the stock market provides a share price quote. In addition to the fundamentals, this price is influenced by analysts' expectations for the company's future success and the supply-demand situation.
As a result, a stock's market price and book value are different. There is no such thing as a market value for an MF unit, though, in the instance of a mutual fund. So, when we purchase MF units at NAV, we are actually purchasing them at book value.
When is NAV calculated?
As the price of the underlying security fluctuates frequently, the NAV of a mutual fund cannot be determined during stock market hours. NAV can be determined after the business day has ended and the closing bell has rung. It is determined using the fund's securities' daily closing values.
How is NAV for Mutual Funds calculated?
By dividing the total net assets by the total number of units released, one can arrive at the NAV of a mutual fund. After deducting any liabilities from the mutual fund's present asset value and dividing the result by the total number of outstanding units, you will arrive at the fund's total net assets. The final number is the mutual fund's NAV.
Thus, the NAV formula is as follows:
Net Asset Value= Assets - Liabilities / Number of Outstanding Unit
How is NAV for ETFs calculated?
The most recent ending prices of the fund's assets and the total amount of cash on hand are used to calculate an ETF's net asset value (NAV). By adding up all of the fund's assets, including cash and any securities, deducting any liabilities and dividing the result by the number of outstanding shares, the NAV of the ETF is determined.
NAV= (Assets minus Liabilities) / outstanding shares.
Daily updates are made to these data elements, which also include the holdings of the fund. This transparency is frequently cited as one of an ETF's key advantages. Mutual and closed-end funds are not obliged to disclose their holdings on a daily basis. A mutual fund offers a daily NAV, but its assets are disclosed on a monthly basis.
Meaning of High and Low NAVs in different schemes?
Let us understand this with the help of an example.
Let us assume there are two hypothetical schemes, A and B. The NAV of Scheme A is Rs. 10, while the NAV of Scheme B is Rs. 50. Let us further assume that we have invested Rs. 1 lakh in each of the two schemes in an equal sum. D
Owing to the fact that we received 10,000 units as opposed to 2,000 units in Scheme B, Scheme A would appear to be a better purchase. Let's now suppose that both strategies have a 10% monthly return. Scheme A's NAV is currently Rs. 11, while Scheme B's NAV is Rs. 55.
Our investment in both instances is worth Rs. 1,10,000. Thus, it is clear that a scheme's NAV has no bearing on its ability to produce profits. We will receive a greater number of units under Scheme A, whereas under Scheme B, we receive a smaller number of units.
The difference in NAV between two schemes with identical portfolios and other factors staying constant won't matter much as long as the returns from the two schemes are comparable.
Closing Note
One of the most important aspects to be understood is that only the quantity of units you obtain is impacted by NAV. You receive fewer units from a mutual fund plan with a high NAV, but the value of your investment stays the same. The mutual fund's performance and your returns are what actually matter.
A mutual fund's book worth is its NAV. While making a mutual fund investment, you should focus on the fund's results rather than its NAV. This can be ascertained by examining the fund's historical results.
Because some mutual funds or ETFs have a NAV of Rs. 10, some investors believe that they are inexpensive. The value of the underlying securities and the total profits made since the start of the plan are used to calculate the NAV of a mutual fund unit.
There may be a case that two different mutual fund schemes may have exactly the same portfolio of securities and yet one may be offered at par value, i.e. NAV of Rs 10. On the other hand, the NAV of the other scheme might be more than Rs 100. Hence, the difference in NAV notwithstanding the intrinsic value of the both the schemes will be completely the same.
Therefore, the NAV of a mutual fund scheme is not the accurate measure of that scheme's success. The overall expense ratio should also be considered by investors among various other parameters like historical performance of the fund before investing in any fund.