Savings is one of the important components in financial discipline and planning. Any wealth creation, retirement planning, or other plans are possible with financial security and consistent savings. One such major avenue for investment is mutual funds, wherein investors invest in the stock market in small amounts and in a diversified way. Here is all about mutual funds and their net asset value (NAV):
What Are Mutual Funds?
A mutual fund is a pool of money managed by a professional fund manager. A number of investors with a common investment objective come together and invest in equities, bonds, money market instruments and/or other securities.
The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s ‘Net Asset Value’ or NAV. In other words, the money pooled in by a large number of investors is what makes up a Mutual Fund.
What is NAV?
NAV is a widely used term for ascertaining the value of claim on a mutual fund scheme asset in the mutual fund industry. The NAV is a market value of a unit in a pooled-fund scheme managed scheme by an asset management company (AMC). AMCs are financial intermediaries that invest funds collected from individuals in a particular scheme. It is calculated on a per-unit basis using the market value of net assets (total asset minus liabilities) of the scheme and total units subscribed by the subscribers/investors.
The NAV is used to estimate the returns for a period of investment. It also represents the claim of an individual subscriber in the total invested fund in a scheme through the number of units held. The NAV is the value at which a unit is available to be invested/ sold and it is calculated on a daily basis.
The total net asset value (NAV) is the difference between the market value of all the securities held by a particular scheme, cash and interest accrued in the portfolio of the scheme and deductions on the account of liabilities. The expenses incurred are deducted from the NAV.
How Does NAV Help Track MF Performance?
The use of NAV is to track the performance of an investment fund/scheme. For instance, the NAV of a mutual fund was X on January 1, 2022, and Y on January 1, 2023. The annual return, i, generated by the mutual fund can be given as: ( − )/ ∗ 100.
Net assets value (NAV) helps an investor find the total market value of the investments made in a particular investment fund/scheme. Suppose an investor holds units in total of a fund (regardless of the date of investment) and the NAV is Y. Then the market value of the total holdings of the subscriber is *Y.
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