For any investor, the total or net asset value (NAV) of his investment is a point of major concern. Whether he invests in the equity market or mutual funds or any other type of investment, the idea behind taking investment decisions is to increase his net worth and the total value of his assets. Net Asset value is a technical term that helps investors keep track of their funds as their investments move from one market cycle to another. It also helps him understand and interpret the total value of his funds. Despite the importance of NAV, even the most seasoned investors are often confused about the concept of mutual fund NAV. Let’s take a look at what NAV is and how it is different from share prices.
What is mutual fund NAV?
Net Asset Value, also known as net value and net book value, often abbreviated as NAV represents the per unit market value of a fund. It refers to the price at which an investor buys his fund units from a mutual fund company. Mutual fund NAV also represents the price at which investors sell their units back to the fund house. Generally, NAV is calculated by dividing the total value of all the assets in the investor’s portfolio, while deducting the liabilities and expenses incurred in it. NAV helps investors to keep track of their fund’s performance. It enables them to calculate the actual increase in their investments by determining the percentage increase in the mutual fund.
NAV calculations are done at the end of each market day by either the mutual fund house itself or by an accounting firm appointed by them. The calculation is done by taking in account the closing market prices of all underlying holdings, securities and stocks, held by a particular mutual fund scheme. As the price of the holding keeps changing continuously, it is virtually impossible to calculate the NAV before the market closes.
How is NAV different from share price?
Unlike NAVs, share prices are quoted on the stock exchange. Also, apart from the fundamentals, share prices largely depend upon how analysts view a company and its performance in the future. Share prices are also determined by market forces after taking the demand and supply ratios into account, whereas the demand for a mutual fund does not change the mutual fund NAV. Also, there is a difference between the market price of a stock and its net value. But when it comes to mutual funds, the concept of the fund’s market value does not exist. Therefore, when you buy units of mutual funds at NAV, you are buying it at book value. NAV is generally compared to the face value of a share as opposed to the share’s market value.