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Meaning and Importance of NAV in mutual fund

NAV or Net Asset Value is the per share market value of the fund. The assets of the mutual fund when subtracted from the per unit liability value of the same fund gives the NAV. But very few investors understand what it is and what importance does it have. So, if you have any confusion regarding Mutual Fund NAVs, read on to find out more about them.

What is the NAV?

The NAV of a fund can be framed as the composite amount generated after taking into account the prices of all the securities that are held and any liquid cash is also taken into account. The calculation for NAV is done on the unit basis after all the liabilities have been deducted. The NAV is subject to fluctuation because of its dependency on the price of the securities. The NAV changes as per the change in the securities. If that price goes up so does the NAV amount and vice versa.

Is Market Price of an Equity Share and NAV same?

Well, this is the root of all confusions regarding the Net Asset Value. Most people consider that the market price of an equity share is the same as that of NAV, which is completely wrong. Many investors have got the notion that a fund at suppose Rs 20 is cheaper than a fund at suppose Rs 200. But this is not true. No matter what the NAV of a fund is, if the portfolio of two funds is the same, then they are of the same value. To make the shares available to investors, the stocks are listed at a certain price. This price is determined by various factors including the company’s potential and the demand-supply ratio. So, from this, you will understand that the NAV and the market price of a share are always different.

Is NAV a determining factor in selecting funds?

Buying or selling of mutual funds at NAV should not be mixed with the idea of market price. The stock price is decided keeping in mind various factors and the number of investors in the stock market fixes it. On the other hand, the NAV is not decided or fixed by the investors and is calculated based on the scheme value. This is one of the primary reasons why it is advised not to invest in a mutual fund just by seeing the NAV. It is immaterial in these cases. But when a scheme has a higher value of NAV, it denotes that the plan has been in the market for quite a long time or has fared well. The number of units is what is impacted by the NAV and nothing else. So, coming back to the base question, the Mutual Fund NAVs are not the determining factor based on which you should select the scheme.

So, from the above discussion, it can be concluded that NAV determines how a fund has performed. It, however, should not play any role in your fund selection.

Post Author: Fathiyya Al Shaikh

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