Investors about mutual funds mostly seemed confused about the various financial terminologies. One of the terms that call for a basic level of understanding on the part of an investor is mutual fund NAV Formula. This stands for net asset value or the value per unit of your mutual fund. This serves out to be an important metrics used to compare and evaluate various kinds of mutual funds. In short you arrive at the NAV once you deduct the value of assets subtracted by the value of liabilities on a given day. To arrive at NAV you can term it as net value of asset subtracted by value of liabilities divided by the number of outstanding shares.
This analogy is of particular importance in a stock market. As per performance of an asset the price of a share is prone to change. The reason being all the AMC do not invest their entire fund in equities. The total of the current value of assets along with cash is termed as asset under management. On a day to day basis there is a change witnessed considering the liabilities, assets, change of the shares along with the prices existing in the market. At the end of the day a mutual fund house goes on to publish them.
The method to arrive at NAV
In the domain of mutual fund investing NAV has an important role to play. This states the value of a fund that helps to determine the state of value of mutual fund in a given day. This provides an indicative value of mutual funds at the given point of time. The total value of shares in terms of asset divided by units
Let us explain things with the help of an example. The market value of a mutual fund is expected to be around 600 lakh with the total shares of 10 lakh units and each of them stands to be at Rs 10. Then the NAV per unit value is Rs 60.
At a generic level NAV should not be given a lot of importance, but people in India derive a lot of importance to it. A new fund is expected to have lower value in comparison to the older funds. People are of the opinion that lower net value seems to be the best time when you can end up investing. But as an investor you need to keep in mind that net asset value should not only be the key to judge performance of a fund.
The reasons why investors should not end up giving a lot of importance to NAV
An example is expected to throw more clarity. There are a couple of mutual funds in the market and both of them are expected to have the same portfolio. The first mutual fund could have a NAV of Rs 30 and the second mutual fund is expected to have a NAV of Rs 60. Now both of them have gone on to invest about 20 % of their funds in company CD. If value of shares increase by 10 % then NAV is expected to increase by 2 %.