NAV Meaning
The net asset value (NAV) is the market value per unit of all securities held by a mutual fund scheme. As an investor in mutual funds, you’ve probably heard of the term ‘NAV’. It can assist you in evaluating the performance of a specific mutual fund plan. Simply explained, NAV is the market value of all securities held by a mutual fund scheme per unit.
How Does NAV Work?
When you invest in a mutual fund, you receive units in exchange for your money. As a result, you are now a unit holder in the mutual fund scheme. It’s similar to becoming a shareholder after purchasing stocks. Mutual funds invest the money they receive from investors in the stock market. Mutual funds, therefore, hold a particular amount of assets at any given moment, and mutual fund investors own a certain number of units inside those mutual funds.
To calculate the mutual fund’s NAV, first calculate the mutual fund’s total net assets. This is the market value of the mutual fund’s assets minus any liabilities as of a specific date. The total net assets are then divided by the total number of units issued to get the NAV. As a result, NAV is calculated on a per-unit basis. Because the market value of securities changes on a daily basis, the NAV of a scheme likewise changes on a daily basis. Mutual funds are required to reveal the NAV on a regular basis. Depending on the sort of scheme, this could be daily or weekly. Closed-ended funds disclose its NAV once a week, while open-ended funds do so every working day.
How Might NAV Change?
- Ex-Dividend Date – Mutual fund houses, like corporations, declare the amount of dividend to be distributed a few days before the actual distribution. The dividend date is the date of distribution. When this occurs, the NAV of the fund falls as dividends are deducted from the fund’s assets. The date of this deduction is referred to as the ex-dividend date.
- Redeeming Your Units – There are two methods for exiting a mutual fund: You have the option of selling it to another investor or selling it back to the fund. The latter is known as redeeming. Because of the difference in the total number of units issued to investors, the NAV of the fund changes when you redeem your lot of mutual fund units. Various mutual funds levy investors a fee if they leave within a certain time frame. This amount is subtracted from the NAV, and the difference is paid to the investor. This is known as the redemption price or exit load.
Why Is NAV Significant In Mutual Fund Investing?
Understanding a mutual fund scheme’s NAV can help you make better investment decisions. However, it all depends on the type of scheme you are considering.
- Open-Ended Funds – Unlike closed-ended schemes, these funds do not have a set maturity date. On any business day, you can buy or sell units at NAV-related prices from and to the mutual fund. This means that the fund can issue units at any time. Because of their liquidity, open-ended schemes are preferred by investors. In an open-ended scheme, you can withdraw your money at any moment at the current NAV from the mutual fund.
- Closed-End Funds – These schemes have set maturity dates. Investors can purchase shares in these funds during the initial subscription period. Except in the case of bonus or rights issues, such schemes cannot issue new units after that window closes. After that time, you can only buy or sell units of the scheme that have already been issued on the stock exchanges where they are listed. Due to demand and supply factors, investor expectations, and other market factors, the market price of the units may differ from the scheme’s NAV.
- Interval Funds – These designs mix open-ended and closed-ended characteristics. They may be traded on stock exchanges or made available for sale/redemption at NAV-based pricing at predetermined periods.
What Is The Distinction Between NAV And Market Price?
However, unlike stock prices, which fluctuate by the second during stock market trading, mutual fund NAV does not alter during the day. The NAV, on the other hand, changes daily and is calculated after the markets close. As a result, it is critical for an investor to understand when the fund is priced, as this can affect the buy or redemption price. For example, if one purchases today, he may be acquiring at a NAV price that will occur at the conclusion of the next day.
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Wrapping Up
You should not enter and exit a mutual fund scheme as the market changes. Mutual fund investments, like stocks, pay out only if you have the patience to wait. This is true for both purchasing and selling. It is not wise to select a fund solely because its value has increased during the current market rise. In this context, the NAV of a mutual fund scheme might be a useful instrument. You may be able to anticipate future performance of your nominated funds by tracking their recent NAVs.
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Frequently Asked Questions (FAQs)
A fund’s NAV is determined only once a day, at 3:30 PM, after the markets have closed for the day.
The applicable NAV can be computed by multiplying the fund’s total AUM by the entire number of units. The fund’s net asset value is computed using the closing prices at the end of a trading day.
A negative NAV indicates that a fund’s performance is deteriorating. However, a change in NAV has no effect on the value of your investment.
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