What is NAV of mutual funds?
Mutual funds are
investment schemes which invest in a portfolio of securities. Mutual funds are
managed by asset management companies, where fund managers are responsible for
the performance of different schemes. Units of mutual fund schemes can be bought
or sold on the basis of prevailing Net Asset Value or NAV. In this article we
will discuss about NAV mutual funds.
Expense Ratio
Before we discuss
about NAV, we should understand one important aspect of mutual funds, expense
ratio. For the services the AMCs provide like distribution, fund management,
administration etc, they incur expenses and charge a fee to the unit holders to
defray the expenses. The scheme expenses are charged proportionately against
the assets of the fund and are adjusted in the NAV or price of the unit. TER or
total expense ratio is the expenses of a mutual fund scheme as a percentage of
the scheme assets under management (AUM).
Net Asset Value
The NAV is
calculated by dividing the net assets of the scheme by the total number of
units outstanding. The asset of a scheme is the market value of the securities
and the cash in the scheme portfolio. Net asset is the value of scheme assets
minus the TER and liabilities. Mutual fund units are purchased or redeemed on
the basis of NAVs of the schemes. In simplistic terms, NAV is the price of a
mutual fund unit.
Redemption
When you redeem
units of your mutual fund scheme, your redemption proceeds will be equal to the
number of units redeemed multiplied by the scheme NAV on the day of redemption.
However, if you redeem within the exit load period (as specified in the scheme
information document), the exit load will be deducted from your redemption
proceeds based on the exit load structure of the scheme (as specified in the
SID)
Things you should
know about NAV
At the time of New
Fund Offer (NFO), NAV mutual funds
are priced at par value. Par value is usually Rs 10.
After the NFO, NAVs
will change depending on the market movements. If the prices of the securities
in the fund portfolio increase, NAV will rise and vice versa.
High or low NAV does
not indicate value of a mutual fund scheme, i.e. high NAV does not mean that a
fund is expensive and a low NAV does not mean a fund is cheap. Even a NAV of Rs
10 or lower, does not imply that you are investing in a scheme at an attractive
price.
High or low NAV is
not an indicator of fund performance, i.e. a scheme with a high NAV is not
necessarily a good performer and vice versa.
The percentage
change in NAVs of a scheme over a period of time expressed in compounded annual
growth rate (CAGR) is a measure of the scheme’s performance. Absolute NAVs are
irrelevant as far as performance is concerned.
If you are investing
through SIP
investment, you buy units of your scheme at different prices based on
prevailing NAVs on the SIP instalment dates. Since NAVs of a scheme can move up
or down depending on market conditions, you can take advantage of market
volatility through Rupee Cost Averaging. SIP investment helps you accumulate
units at different price points and thus benefit from rupee cost averaging.
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