One of the important terms that you will come across when picking mutual funds is NAV. NAV stands for Net Asset Value and refers to the fund’s per unit market value. It is the cost at which an investor purchases fund shares from a fund company and redeems the same by selling it to a fund company. NAV essentially denotes the price of per share of the fund. As with stocks that have a share price, mutual funds have Net Asset Value.
How does NAV work?
Unlike share prices that fluctuate or change throughout the day, NAV does not. The Net Asset Value is updated at the end of the trading day. It is calculated by dividing the total value of all the assets, minus the total number of liabilities. The reason it is calculated at the end of the day is because it takes into consideration the closing market prices of the securities that are held by the funds. It is usually in the later hours of the evening or any time before 9 pm.
Importance of NAV
NAV is a factor of great importance when tracing share price movements. Albeit, it does not aid in clearly gauging and acquiring an overall view of the fund’s performance. The reason behind this is that at least 90% of the realized capital gains and income is divided among investors each year. This distribution leads to a reduction in the NAV. Thus, NAV should be considered as one factor but not the only concern. While it may reflect a drop, in actuality the net value of the investment remains unchanged.
When investing in mutual funds, you must be certain about the different aspects related to mutual funds. It is important that you effectively define your objectives and investing goals. If you are looking to derive returns to be used over a latter period, then a long-term goal is best suited for you. It is advisable to choose a financial advisor who can guide you through the path of investment. Remember, mutual funds are subject to market risk. You must ensure that you make informed choices when investing in the same.