Did you know that as of end-March 2017, Indian mutual funds had more than 5.2 crore retail investor accounts? According to a study by industry body AMFI, jointly with CRISIL, retail investors parked an astonishing ₹8.7 lakh crores in domestic mutual funds, as compared to ₹3.2 lakh crores just five years ago.
Needless to say, mutual funds have earned the confidence of investors and are emerging as a popular investing vehicle.
Any person, who is investing for the first time in mutual funds, may not be aware of a basic but important term, NAV. It is an important value, which determines the value of a mutual fund. Net Asset Value is calculated for each unit number. Its value is calculated on the basis of all the investments made by the fund, minus the expenses. This value helps the investor know if their fund is undervalued or overvalued.
Net asset value (NAV) is the value of a fund's asset, less the value of its liabilities per unit. In other words, it is the value at which an investor buys funds from a fund company or sells it back to the fund company. In even simpler words, NAV gives the investor the fund's value, which they are entitled to at the time they withdraw their investment.
However, they'll be charged a fee as an exit load on redemptions before a stipulated period. The exit loads can vary for different mutual fund schemes. Exist loads are usually levied to discourage investors from withdrawing too early from the schemes.
NAV can be mathematically calculated as:
Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding Units)
To understand it better, let us take an example,
If an investor has invested ₹5,000 in a mutual fund, which has an NAV of ₹200, he will receive 25 units. Let us suppose that this value increases to ₹225 the next year. Now, if the investor decides to sell the units, he will get ₹5,625. However, if the exit load is applicable at the rate of 1%, the investor will get ₹5,568.75 (25X (225-2.25))
Investors should know that it is completely irrelevant how high or low the NAV of a fund is. Although a low value would mean a higher number of units held, while a higher value would translate to lower number of units, the amount of investment in the two funds will remain unchanged, if they have an identical portfolio.
