Mutual Funds are by far the safest investment channels available today. They offer steady returns and involve relatively lesser risks. Hence, they are ideal means of building wealth. But to reap such benefits, the investor should inspect various factors. Apart from market fluctuations, they should also check other aspects. One of the most crucial ones is NAV or Net Asset Value.
Assessing this component is important for various reasons. It gives the investor a gist of the investment’s market potentiality. It helps the investor decide whether the asset is worth purchasing. Here is all you need to know about NAV and its significance in Mutual Funds:
Meaning
NAV refers to the net value of a specific entity. It is the total value of an entity’s assets and the total value of its liabilities subtracted. Hence, it is used in reference to a Mutual Funds Investment. In some cases, it is also used in Exchange-Traded Funds or ETFs. This way, it applies to most financial products or business entities dealing with assets, liabilities, accounting, etc.
Purpose
The primary usage of NAV is to assist in finding suitable investment options. It identifies potential opportunities and allows portfolio holdings. In this manner, you can invest in the market and view your portfolio simultaneously.
Role of NAV in Mutual Funds
A Mutual Fund operates by collecting funds from various investors and creating a pool of money. This accumulated wealth is then used to invest in Stocks and other securities. But the investment and redemption of such assets happen only after the Mutual Fund’s launch. This is because the fund house takes time to price its assets. A key contributor to this delegation is NAV.
It acts as a mechanism through which the fund prices its Shares or securities. If there is any change in the fund’s NAV, there will be a corresponding shift in its assets’ pricing.
Significance of NAV
NAV is imperative because it serves as a quantifiable source of pricing information. It enables you to predict the potential risks or challenges concerning the investment product. For example, you select a Mutual Fund Investment. Now, you can assess its NAV to check the assets against the liability ratio on Trading platforms. Avoid it if you see that the fund has more liabilities than assets.
However, if the assets are more, you could consider investing in them. Thus, it is safe to say that NAV plays a significant role in an investor’s market success.
Formula
Calculating the NAV of an asset is relatively easy. It involves a simple formula that is as follows:
NAV = (Assets – Liabilities) ÷ Total amount of outstanding shares
Note that NAV is the per-unit market value of all the assets a Mutual Fund holds. Hence, it helps if you compute the value of the units assigned to you.
