Net Asset Value
The net asset per unit of a scheme is calculated as Net assets/Number of outstanding units of the scheme. This is the Net asset value (NAV). The NAV of the scheme will change with every change in the Net Assets of the scheme. All investor transactions are conducted at the current NAV of the scheme.
It can also be depicted by the following formula
NAV = (Assets - Liabilities)/ Number of outstanding shares
In this context, Assets include total market value of the fund's
investments (priced using the closing price of all the assets on the day
the NAV is calculated), cash and cash equivalents, receivables and
accrued income.
Liabilities equal total short-term and long-term
liabilities, plus all accrued expenses, such as staff salaries,
utilities and other operational expenses.
NAV is significant only for open-end mutual funds. It is a simple calculation -
just take the current market value of the fund's net assets (securities
held by the fund minus any liabilities) and divide by the number of
shares outstanding. Thus, if a fund has total net assets of Rs.5 crore and there are 10 Lakh shares of the fund, then the NAV is Rs.50 per share. (Fund liabilities include items such as fees owed to investment managers.)
For
closed-end funds, share value is determined in the secondary markets
(the formal exchanges) where the shares are traded. The NAV of a
closed-end fund is the price per share multiplied by the total number of
shares. Obviously, the value of a closed-end mutual fund changes
continuously throughout the trading day.
For
open-end mutual funds, NAV is a useful determinant for tracing share
price movements. However, it is not useful for evaluating overall fund
performance. This is because mutual funds may distribute a percentage of their realized capital gains and dividend
income to investors each year. When a fund pays investors the required
distribution, its NAV is reduced by the amount of the distribution.
Investors tracking only NAV may become concerned about the drop but in
fact, the net value of their investment is unchanged; the reduction in
NAV is offset by the amount of distribution they have been paid.
Note: The
most important thing to keep in mind is that NAVs change daily and are
not a good indicator of actual performance because of the impact yearly
distributions have on NAV (it also makes mutual funds hard to track).
The Net assets of a scheme may go up whenever investors buy additional units in the scheme and invest more funds, or when the value of the investments held in the portfolio goes up, or when the securities held in the portfolio earns income such as dividends from shares or interest on bonds held.
Similarly, the net assets of the scheme will go down if investors take out their investments from the scheme by redeeming their units or if the securities held in the portfolio fall in value or when expenses related to the scheme are accounted for. The Net Assets of the scheme are therefore not a fixed value but keep changing with a change in any of the above factors.
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