How to interpret NAV and its effect on your Mutual Fund Investment

Mutual funds are the investments made up of money collected from many investors who are willing to invest in assets like shares, bonds, money market instruments and much more. A mutual fund's portfolio is kept to match the investment purposes. There is hype in the market about mutual funds and people are largely investing in NFOs (new fund offers). Also, people keep switching to NFO’s which totally doesn’t make any sense because the newer schemes do not have anything better to offer and you simply cannot invest your money into a particular scheme just by looking at its NAV.

Whenever we talk about mutual funds, you must have heard about the acronym NAV, i.e. Net Asset Value. Most of the time, it is wrongly interpreted as the cost of the mutual fund scheme. It is nothing but the value of a single unit of a mutual fund. Like you have a price for each share of a company, you have a price for a single unit of a mutual fund which is nothing but NAV.

Mutual funds are totally dependent on NAV (Net Asset Value). The value at which you get to buy or sell a single mutual fund unit is called NAV. Assets are bought or sold on the price decided by the market forces of demand and supply. The total value of the underlying stocks, bonds, deposits held by a mutual fund minus the daily expenses, all of this divided by the total number of units available with various investors on a particular given day, gives you the net asset value of the mutual fund on that day.

As the market value of these stocks, bonds, mutual funds change every day, the NAV of a mutual fund also changes every day. Let us try to understand NAV with the help of an example, let’s assume there is a mutual fund and as of today, the total value of stocks, bonds, deposits held by the mutual fund minus the daily expenses is around Rs.100 crore and there are 10 crore units of this particular mutual fund held by various investors. So, what would be the NAV of this mutual fund? It would be Rs.10 as of today. If you invest Rs.10,000 in this mutual fund, you will be allocated around 1,000 units of the mutual fund. After some days, you want to sell off these 1,000 units of the mutual fund and the price of a unit has increased to Rs.12, then selling off the units will give you Rs.12,000.

Whether buying a car, mobile or groceries, we tend to look for the lowest price we can get. While investing in mutual funds, we tend to go for the fund that offers us a lower NAV. People think that a fund having high NAV is expensive than a fund having low NAV. This is a misconception.. NAV is just a number and it doesn’t affect the profit that you will reap from a mutual fund. The thing that only matters the most while investing in mutual funds is the funds’ past performance. So, make a note of it, do not compare the two mutual fund schemes based on their NAV only.

The NAV only impacts the units someone is willing to buy. A buyer will get fewer units if he selects any scheme with high Net Asset value irrespective of their investment. NAV is an indicator of the below mentioned things:

·NAV helps the buyers to calculate the number of units they can buy in a certain scheme.
·It helps the Buyers in calculating recovery amount and profit on their amount.
·The NAV number helps the buyer in measuring the general performance of a particular scheme.

In totality, net asset value does not affect the investor’s return that they get from the mutual funds; rather it depends on the mutual fund scheme that they are investing in because the performance of every scheme varies from the other. The easiest way to check is, to look at other indicators, like

1.            Command of the fund,
2.            The fund's old performance,
3.            How long the fund has run,
4.            Size of the fund and the fund manager's experience

Always focus on these 4 key points before making final decision to invest in a mutual fund. Now you know all about NAV and what it actually does.

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