What is NAV and how is it Calculated?
The act of devoting time, mind, energy, resources into sometime with an expectation a return is called an investment. In business context, it is putting in money and resources in expectation of a profit. And when this much has been devoted or given in the person doing all this or the investor wants returns that are as per his goals that he had set before investing his money. But to efficiently invest and earn profits one must be proficient with the terminologies of the market. In Investment in the stock market there arises one such term which is the NAV or the Net Asset Value.
The NAV is the market value of the fund per share. It is the value of the share at which the investors buy a share or sell it to another company. The NAV is important as it is the number from which the fund per unit price of the share is calculated. It is the total sum of the market value of the shares held in a portfolio along with cash and the assets along with it divided by the total number of stocks outstanding. Thus, when we talk about the mutual funds the NAV can be termed as the book value.
Since when we talk about the stocks of the company they are available at the prices that are mentioned in the stock markets which are estimated and set as to how the company would perform in the near future and as to how it has been performing and thus this is not the book value but either higher or lower than the book value. But when we talk about mutual funds then we have no such aspect of the market value in mutual fund unit and that is bought on the book value and since it is that the stocks are purchased at the value they are worth. There is no higher or lower price or value.
The NAV is important because it tells us the value of the assets in the fund the investor has invested in. When the mutual fund manager starts investing in the equity shares or debt markets then if profits occur then there increase in value and if loss is taken then value decreases thus NAV tell the real value of these assets that the investor has invested into. This value has no other significance than this and this value can never be used to estimate the future performance of the mutual fund.
In calculation of the Net Asset Value we follow the following steps:
- The total value of the assets is calculated along with the profit or the loss taken and if required the currency exchange rates are to be taken into account as well.
- In the second step we calculate the total value of liabilities which is the amount of interest and the cost that the mutual fund has bears its debts.
- The final calculation is the difference of the total value of assets and the total liabilities of the funds divided by the total number of outstanding shares.
Formula = (fund asset value – fund liabilities)/ outstanding shares
It is to be noted that the NAV can never govern the future performance of the stocks or the fund and the returns are independent of NAV. Once you are familiar with this concept, investments in mutual funds will be a step simpler for you. However, if you still have a few concerns, you can always leaf through websites like https://groww.in/explore ,that provides detailed information about mutual funds, that you might want to know as an investor.