You need to have a lot of knowledge about the markets if you plan to invest your money in stocks. In such a case, the problem is for the people who do not have much knowledge. Hiring a dedicated fund manager can be expensive and it might not prove to be that fruitful either. In such a case, the best investment option for the people can be Mutual Funds.
When you invest in Mutual Funds, you get a skilled Fund Manager for your investments who is managing the pool of funds and hence you do not have to worry about gaining the investment knowledge at all. All you have to do here is that you have to invest your money and you can then forget about it. The fund manager will invest your money in different securities based on the type of mutual fund that you invest in.
When you invest in a mutual fund, you would have noticed that there is a price associated with each fund. Do you know what is the price is? Do you know how this price is decided? And do you know how does this impact your investments or returns? Well, we are going to answer all these questions for you in this article and you can sit back and go through the sections ahead to understand the concept of NAV.
What is NAV?
NAV stands for Net Asset Value and this is basically the price of Mutual Fund. This NAV is calculated at end of every trading day as the value of the assets or securities changes on the daily basis. To help you understand this better, we would like to give you an example. If the NAV of the mutual fund is Rs 100 and if you have invested Rs 1000 in a fund then you will receive 10 units of the mutual fund.
You must know that the Mutual Funds are purchased as well as redeemed at the Net Asset Value. This means that if you have 10 units of a mutual fund and the NAV of the Mutual Fund today is Rs 108 then you will receive Rs 1080 for redeeming all the units of mutual funds that you have.
This was a basic idea about the NAV. Let us now see how the NAV is calculated.
How is NAV Calculated?
To understand how NAV is calculated, you need to understand the formula for NAV. Below is the formula for NAV.
NAV = (Total Asset – Total Liabilities)/Number of Units Outstanding
So basically, to calculate the NAV, the fund managers simply subtract the value of liabilities from the total value of assets. This amount is now divided by the number of outstanding units to get the exact value of NAV.
This is calculated after every trading day and the reason for the calculating the NAV on daily basis is that the value of assets changes daily depending on the markets and fluctuations. You now have an idea about the fundamental of NAV Calculation. You must know that the NAV impacts your investments and returns. You can check out the section below to understand how it affects your investments.
How does NAV affect your Investments?
NAV is one of the main things that would have an impact on your investments. We have already mentioned that the mutual funds are purchased and redeemed on the Net Asset Value. This means that your total investment is the product of the units that you hold and the NAV of the mutual fund at any point in time.
You might find it complicated but let us understand this with help of a table. The first column represents the date, the second column represents the units that you have, the third column represents the NAV of your mutual fund on the date, the fourth column represents your investment value and the fifth column represents your daily return. We have added the sixth column here to indicate your net return.
To begin with, we are assuming that the NAV of mutual funds when you purchased (26 December 2018) was Rs 100.
|Date||Units||NAV in Rs||Investment Value in Rs||Daily Return||Net Return|
So, you would have seen how your investments are impacted by NAV. Now, the NAV can be dependent on several factors. For example, if you invest in a pure debt fund then the NAV won’t be impacted by the fluctuations in the stock market but if you invest in a Mutual Funds that have investments in various stocks or equity shares then your NAV will surely be impacted by stock market fluctuations. There may or may not be a correlation between the market movement and NAV.
This was all about NAV and now we are sure that you will be able to understand how NAV impacts your investments.