How Are Mutual Fund Returns Calculated?
The NAV of a mutual fund is calculated by dividing the fund’s total net assets by the total number of units distributed to investors. When it comes to investing, there are a few very important phrases. For mutual fund investors, one such term is NAV.
Mutual Funds NAV
Mutual funds take money from investors and reinvest it in the stock market on their behalf. The net asset value (NAV) is the market value per unit of all securities owned by a mutual fund scheme. If you invest in a mutual fund, the fund will issue your units depending on the amount you invest.
Calculation Of Mutual Fund Return
The NAV of a mutual fund is calculated by multiplying the total net assets by the total number of units issued. Subtract any liabilities from the current value of the mutual fund’s assets, then divide the result by the total number of units outstanding to obtain the total net assets of the fund. The mutual fund’s NAV is the outcome of this calculation. As a result, the mathematical formula for NAV is as follows:
Net asset value = Assets – Debits / Number of outstanding units
A mutual fund’s NAV is always computed after the trading day. Because the market value of securities fluctuates daily, this is the case. As a result, the NAV of a mutual fund fluctuates daily.
Distinction Between NAV And Stock Price
The NAV of a mutual fund is often confused with the market price of a stock by investors. As a result, they believe that a lower NAV equals a lower price and hence a better investment when investing in mutual funds. Let’s look at why this is a bad assumption.
A company’s shares become available for purchase when it is listed on the stock market. The stock exchange lists the price of the company’s shares. That is the share price on the stock exchange. The price of the company’s shares is affected by factors such as the demand-supply dynamic and the company’s potential. As a result, the market price of a stock differs from its book value.
There is no such thing as a market price of a unit in mutual funds. At book value, we purchase mutual fund units. The book value of a unit is hence the NAV of a mutual fund. As a result, the market price of a company’s stock and the NAV of a mutual fund is considerably different.
High And Low NAV
Some distributors advertise new fund offerings by emphasising their low net asset value (NAV). They persuade investors that purchasing a mutual fund with a low NAV is a good bargain. This is because some investors confuse the NAV of a mutual fund with the price of a company’s shares. A low stock price indicates that the stock is being offered at a discount. The same does not apply to the NAV of a mutual fund, as previously stated. The NAV cannot be used to determine how costly or inexpensive a fund is. The NAV simply indicates a mutual fund scheme’s current worth per unit. A high NAV may only indicate a mutual fund scheme’s favourable performance. It also implies that the system has been in operation for quite some time.
The quantity of units you get is solely affected by NAV. You get fewer units in a mutual fund with a high NAV, but the value of your investment stays the same. What counts is the mutual fund’s performance and the returns you get.
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Example
Assume you have invested in mutual fund schemes X and Y. The NAV of Scheme X is Rs 10 while the NAV of Scheme Y is Rs 50. You put a total of Rs 1 lakh into both plans. Scheme X may seem to be less expensive since it includes 10,000 mutual fund units, but Scheme Y only includes 2,000. Assume that after a month, both systems provide a 10% return. This indicates that Scheme X’s NAV is Rs 11 and Scheme Y’s NAV is Rs 55. The total amount of your investment in both programmes is Rs 1.1 lakh. The sole difference is that with Scheme X, you obtain more units than with Scheme Y. As a result, the NAV of a mutual fund has no bearing on the fund’s performance.
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