Net Asset Value (NAV) acts for the net value of an entity. NAV represents the unit price of the fund at that date and amount. It is most commonly used for the context of mutual funds or an exchange traded fund (ETF).
NAV is considered as the market value of the securities held by the scheme, therefore it can be said that performance of a particular scheme of a mutual fund is denoted by NAV. As it is known by all that the price of the securities in the market change almost everyday, therefore the NAV also changes accordingly.
NAVs of all mutual funds schemes are declared at the end of the day, when trading is closed as per the SEBI mutual fund regulation.
Mathematical representation of NAV -
Formula for NAV = Assets - Debts / Number of outstanding units
When is NAV calculated?
NAV is calculated at the end of the trading day, as it is impossible to calculate during the day when trading occurs as prices of the underlying securities (say stocks) change every second, which makes it difficult to calculate NAV. Therefore, it is calculated at the end of the day, taking into consideration the closing market prices of the securities which are associated with a particular fund or scheme.
What does high or low NAV in different schemes mean?
This can be best explained through an example:
Let’s suppose there are two schemes; Scheme A and B. Scheme A has a NAV of Rs. 50 and scheme B has a NAV of Rs. 10 and the investment made by the investor is same in both the schemes which is Rs. 1 lakh.
Therefore, scheme B would come out to be a cheaper buy as the investor gets 10,000 units while scheme A will have 2,000 units. Now, the schemes 10% in a month which means, scheme A is now Rs.55 and scheme B is Rs.11. Therefore, the value of the investment remains same in both the schemes i.e., Rs. 1,10,000.
Therefore, the value of NAV is irrelevant as long as other things between the two schemes are equal and the end result, which is the return, is the same.
NAV and Mutual Funds
A fund works by collecting money from the investors. Then the capital thus collected is invested in stocks of other financial securities which aligns with the objective of the fund. Each investor gets a particular number of shares according to their amount invested, which they can later use to sell or pocket the profit or loss incurred from the same.
The process of investment and redemption requires a particular price of the fund shares, this process is carried out by NAV. Therefore, consequently as NAVs update, so does the price of the shares.
The stock prices keep changing every few moments, but that does not happen in case of mutual funds. The NAV of a fund is calculated at the end of the trading day.
NAV and Exchange Traded Funds
Exchange traded funds and closed-end funds trade like stock on exchanges, they usually get traded at a price above (trading at a premium) or below (trading at a discount) the actual NAV. It is quite beneficial for investors who invest in ETFs and know when to spot and encash. Just like mutual funds, NAV in exchange traded funds is calculated at the end of the trading day.
Besides the unit price of the fund, NAV also acts as a factor to represent the performance of the assets of the funds. It should also be noted that the investors should not base their sole decision on NAV, as they show the performance of the assets in the previous years. The investors should look at their returns from the investment to make the decision.