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What Does Net Asset Value Of Mutual Fund Mean?

By Author: Bhagath Varma
Total Articles: 12

If you are a mutual fund investor or are planning to invest in mutual funds, you surely would have come across the term ‘NAV’ a dozen times. Then let’s answer it for you, what is Net Asset Value (NAV) of a mutual fund. To put it simply, NAV or Net Asset Value of a mutual fund is the unit price of a mutual fund or the price at which investors buy and sell units of a mutual fund. Just like everything that you buy or sell in a market has a per unit price, so do mutual fund units.

Now let’s talk a bit about how is NAV calculated for a mutual fund. As you know a mutual fund is a pooled investment vehicle that collects the money invested by all its unit holders and invests this pool of money in various securities. The fund managers of a fund buy and sell securities on behalf of the investors during the day when the securities are traded in the market. Since the price of each security varies all through the day when the market is open for trading, the NAV of a fund can only be calculated at the end of the day when the markets are closed. At the end of the day, the total value of all the securities held by a mutual fund are added by taking the closing price of each security included in the portfolio.

Now the mutual fund also has liabilities to bear apart from its assets or portfolio holdings. What are these liabilities? Every mutual fund has some expenses to bear like administrative expenses for managing the fund, commissions to be paid to distributors, marketing expenses etc. These expenses are borne by the investors because a part of the collective investments held by a mutual fund is used to pay for such expenses.

Apart from these expenses, a mutual fund also receives redemption requests from its existing investors i.e these investors want to sell a part or all of their holdings in a mutual fund. Now the fund has to set aside some money to pay for these requests which have come in through the day. The fund may also have dividends to be paid to investors because the underlying holdings(stocks) of the fund have declared dividends. So, some money needs to be set aside for making these dividend payouts. Thus, at the end of the day when the market closes all the payouts to be made are added up to arrive at the fund’s liabilities.

The mutual fund NAV is calculated by subtracting all liabilities from the total asset value of the fund and then dividing this net asset value by the total no. of units of the fund held collectively by all its investors.

As an investor, you shouldn’t focus too much on the NAV of a fund because it’s just the unit price of the fund and is not indicative of any mutual fund performance per say. Since the NAV is a function of the prices of the underlying securities of the fund (asset value of the fund) which again are determined by the market, the NAV doesn’t reflect the fund management capabilities of its fund manager in anyway. What you should look at is how the NAV of a fund has changed over a certain period to calculate the returns the fund has given in the past. This again is not indicative of future performance, but it does give you a fair idea about how the fund has performed against its peers or benchmark in the past. You can look at the latest NAV of mutual funds on the respective websites of these funds and most sites also provide you the performance data of their funds for 1 yr, 3yr, 5 yr or since inception.

You can read more about mutual fund NAVs and a lot more on mutual funds on this funds site called www.mutualfundssahihai.com. it’s a site meant to educate investors like you and is an initiative of the mutual fund industry body, AMFI. Check it out!

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