Definition of Net Asset Value (NAV)
The net asset value (NAV) is the term used to denote the net worth of any entity. It is most commonly used for a (https://www.pvot.in/blog/how-to-start-investing-in-mutual-funds/) mutual fund or an ETF (exchange-traded fund). Theoretically, any business entity or financial product that deals with the accounting concepts of assets and liabilities can have a NAV. In companies and businesses, the difference between the assets and the liabilities is known as the net worth or net assets or the company's capital. The term NAV has gained much popularity in the fields of fund valuation and pricing.
How to calculate NAV?
One can easily calculate the NAV by dividing the total net assets by the total number of units issued to investors.
Formula = (Assets - Liabilities) / Total number of outstanding shares
Mutual funds pool the money from investors and invest it on their behalf. NAV is the per-unit market value of the equities held by an MF scheme. If you are an investor, the fund assigns units to you based on your investment amount.
Some common misinterpretations - Some points to remember are while using NAV while selecting mutual funds:
- Some fund managers promote new fund offers by highlighting their low NAV, but getting more units does not result in higher returns. So, the NAV is not an adequate measure of whether a fund is cheap or expensive.
- One should not be biased toward higher NAV on a particular day because it does not ensure higher returns. Instead, one must study the fund's past performance of NAV in the recent past. Comparing these historical figures may help to assess how a fund might perform going forward.
- Do not confuse the NAV of a mutual fund with the stock price. A stock market trader collects profits by selling shares when their price rises. But that is not how NAV works.
Importance of NAV:
The NAV shows the current value per unit. A high NAV may reflect the positive performance of a specific scheme. It affects the number of units one receives. A mutual fund with a high NAV gives you fewer units, but the value of your investment remains the same.
Often, NAV is approximately equal to the book value. The companies considered to have high growth prospects are traditionally valued more than the NAV suggests. NAV is generally compared to market capitalization to find undervalued or overvalued investments. Several financial ratios use multiples of NAV or enterprise value for analysis.
Alternatives to NAV:
NAV has its usage, but it doesn't tell the whole story of a mutual fund's performance. But what matters is the performance of the mutual fund and the returns one gets. One should factor in many details like past performance, AUM size, alpha and beta while investing in a mutual fund. The important thing is total returns; it is expressed as a percentage of the NAV over a given period. It represents both appreciation and fund distributions. Together, these reflect the actual return on investment of a mutual fund.
Net Asset Value (NAV) - Frequently Asked Questions:
1. What Is the Difference Between NAV and AUM?
While investing, you can ignore the NAV, not the Asset Under Management. It is the total asset controlled by the mutual fund.
2. When is NAV updated?
SEBI mandates mutual funds to update the NAV by 9 pm every day.
3. How Do Sensex and Nifty50 affect the value of the NAV of a Mutual Fund?
Degree to which a mutual fund NAV is affected by Sensex or Nifty50 depends on the type of mutual fund and weightage of sensex or Nifty50 stocks held in that mutual portfolio.
4. Can the Value of a Mutual Fund's NAV Drop like in the Case of Stocks?
Yes, the NAV of any mutual fund can drop depending on the value of the assets held by them.
5. How do dividends affect Net Asset Value?
The NAV declines by the amount distributed, but the total value of the fund investment for the investor stays the same.