What is NAV?
A mutual fund scheme comprises of several units, also called as unit shares. The Net Asset Value or NAV of each such unit is basically its market value. In other words, it is the price at which an investor purchases or sells the units of their mutual fund scheme.
When you invest in mutual funds, you would find that several assets are managed under a fund. The Net Asset Value (NAV) of a mutual fund is announced by the Asset Management Company [AMC] on a daily basis, irrespective of the type of mutual funds. Typically, it is mandatory to disclose the NAV of mutual funds on the AMC’s website by evening. This becomes the basis of mutual fund investments for investors the next day.
How is the Net Asset Value relevant to investors?
It is not sensible and advised to base your investment decision solely on the Net Asset Value of any particular mutual fund scheme. Remember that NAVs do not entirely reflect the future prospects of any mutual fund scheme. It is merely the total value of the mutual fund scheme minus expenses and liabilities.
Hence, a higher NAV equals that the scheme investments have prospered too good or the scheme has been around for quite a time. Instead of focusing on just NAV of a scheme, investors should focus on the performance of the mutual fund scheme and the returns generated by the scheme.
What is the difference between Net Asset Value & Market Price of a Mutual Fund scheme?
Investors often blindly assume that the market price and the net asset value or NAV of a mutual fund scheme are the same. However, this is not true. They might be buying or selling the units of a mutual fund scheme at NAV but it shouldn’t be confused with the market price of a mutual fund scheme. The investors decide the share price in the stock market. On the other hand, the investors do not have the power to decide the NAV of any mutual fund unit.
Factors such as entry and exit of investors, company’s potential, demand and supply, etc. also determine the share price of a mutual fund scheme. So, the NAV will always be altered than the market price of a stock.
When an investor invests in mutual funds having a low NAV value, they would be allocated additional units as compared to investments in mutual funds with a higher NAV. This is one of the primary reasons why several investors think that it is better to invest in mutual funds that have a lower NAV. However, what they fail to understand is that the factor that really matters is the difference between the values of the NAV when they are purchased and sold. Thus, an investor shouldn’t be influenced by holding more units in a mutual fund scheme with lower NAVs. Happy investing!