21 May 2024
In recent years, different types of SIP investment in Mutual Funds Schemes have gained huge popularity among investors from all backgrounds. Due to its disciplined approach to long-term wealth creation, a lot of people opt for it. However, the performance of a mutual fund scheme depends highly on one well-known metric called net asset value (NAV). NAV is one such parameter that can help investors know the current value of mutual fund units based on which they can track prospective values and make decisions accordingly. In this article, the reader will get to know about NAV and its utility.
What is NAV In a Mutual fund Scheme?
NAV, In the Mutual Fund context, stands for Net Asset Value. It represents the per-unit market value of a mutual fund scheme on a particular day. NAV is calculated by subtracting the total liabilities of the fund from its total assets and then dividing the result by the number of outstanding units.
NAV is typically calculated at the end of each trading day because mutual fund prices are based on the closing prices of the securities held in the fund's portfolio. Investors often use NAV to track the performance of their mutual fund investments. However, it's essential to consider other factors such as fund expenses, investment objectives, and risk profile when evaluating the suitability of a mutual fund for investment.
How does calculating NAV help an Investor?
NAV is one of the tools that helps in decision-making and financial planning. By reviewing NAV value regularly, one can easily assess if their investment is on track or requires an adjustment.
Understanding the calculation of NAV in mutual funds may significantly help investors to make better decisions.
1. Valuation of Investments
The primary reason for calculating NAV is to know the total value of a mutual fund’s Schemes at any given point in time. This helps investors to get some clarity as to which schemes they should focus more on in the long run. Additionally, it allows them to get an accurate value of their investment portfolio at any given time, leading them to a better investment path.
2. Cost Averaging
Calculating Net Asset Value (NAV) is beneficial for investors, especially in the context of cost averaging. Cost averaging is a strategy where an investor regularly invests a fixed amount of money in a particular investment over time, regardless of the asset's price fluctuations. Cost Averaging happens when an investor purchases several units of mutual funds at different NAVs over time.
This helps them mitigate market volatility and risks to their investments. When NAV is high, investors buy only a few units, whereas when it's low, they buy more. Over time, this averages the overall cost of units.
3. Performance Evaluation
NAV for mutual funds works like a barometer in determining the performance of mutual funds. With a Positive NAV, one can be assured of favourable performance, showcasing an increase in the overall value of the investment.
On the contrary, a negative NAV shows funds are underperforming and might give negative returns. By tracking NAV movements, one can benchmark indices and peer funds by assessing the relative performance of investments.
4. Risk Management
Last but not least, Calculating Net Asset Value (NAV) is crucial for investors in managing risk within their portfolios. By providing a real-time measure of mutual fund holdings' market value, NAV enables investors to gauge performance, assess liquidity risk, and make informed decisions on portfolio allocation and diversification. Understanding NAV helps investors maintain an optimal risk-return profile, identify liquidity challenges, and evaluate risk-adjusted performance metrics, ultimately aiding in effective risk management strategies amidst market dynamics.
How is NAV calculated?
NAV of Net Asset Value is calculated by getting the total value of mutual fund assets and deducting all the liabilities from it, dividing the overall result by the total number of units. Here is the step-by-step guidance to calculate NAV.
Step 1: Get the total value of all the assets held in the mutual fund. These assets could be any financial instrument.
Step 2: Subtract all the expenses or liabilities that are incurred by the mutual fund from the total value assets calculated earlier.
Step 3: Divide the resultant by the total number of shares or units of mutual funds held in the portfolio. The final result would give you NAV per unit, which represents the real-time value of each share or unit of mutual funds.
Mathematically, one can use the following formula.
NAV of Units under the Scheme will be calculated as shown below:
NAV= Market or Fair Value of Scheme’s investments + Current assets including Accrued Income - Current Liabilities and provisions including accrued expenses / No. of Units outstanding under the Scheme/Option
Conclusion
In conclusion, NAV or Net Asset Value is quite an important parameter that helps an investor to get the value of their mutual fund investment and implement different strategies by evaluating performance and managing the risks. By regularly getting Investment NAV, investors can make informed decisions to optimise their portfolios to achieve their financial goals effectively.
NAV is a tool used by investors to monitor the performance of their mutual fund holdings. When assessing a mutual fund's eligibility for investing, it's crucial to consider additional elements such fund expenses, investment goals, and risk tolerance.
Frequently Asked Questions
1. What is NAV in a Mutual fund Scheme?
The net worth of an investment fund's assets less its liabilities is its net asset value, which is then divided by the total number of outstanding shares.
2. When the NAV will be considered good?
A NAV is considered good in Mutual fund Investing when it positively grows the value of mutual fund unit in any market condition, helping investors achieve their financial goals.
3. How is NAV calculated?
An investor can easily calculate NAV by dividing the mutual funds (assets- liabilities) by the total number of outstanding units.
Mathematically, one can use the following formula.
NAV of Units under the Scheme will be calculated as shown below:
NAV= Market or Fair Value of Scheme’s investments + Current assets including Accrued Income - Current Liabilities and provisions including accrued expenses / No. of Units outstanding under the Scheme/Option
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Disclaimers
SIP investments do not guarantee of any profit/loss in an upward/declining market. Kotak Mahindra Asset Management Company Limited/Kotak Mutual Fund is not guaranteeing or promising any returns/future performances.
The material is not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY