Mutual Fund: Clarify your concept on Net Asset Value, understand the role of NAV in mutual funds..
Today, retail investors are constantly expanding their knowledge on investing, learning from past mistakes, and exploring other investment options. However, despite these efforts, most investors are focused on pursuing investment options that carry lower risk and offer better returns than banks. Mutual funds are the right choice here. This is why SIP inflows are constantly increasing, leading to a growth in Asset Under Management (AUM).
Mutual funds are a sector about which the more information you gather, the less available it is. You've likely heard of NAV (Net Asset Value). But have you understood this topic in detail? If your concepts are unclear, Rishabh Rajvanshi, founder of Three Dots Finitude, provided insight. He provided valuable information on the subject of NAV on Jagran Business's show "Finance Ke Funde."
What is NAV?
It's worth noting that the performance of a mutual fund scheme is reflected in its per-unit NAV. NAV is the per-unit market value of a fund's total assets. To calculate it, subtract total assets from total liabilities and divide by the total outstanding units. This yields the per-unit market value. You can track a mutual fund's NAV on the fund house's website and AMFI (Association of Mutual Funds in India).
"The NAV information on the fund house's website and AMFI helps investors buy or redeem funds the next day." - Rishabh Rajvanshi.
What is the role of NAV in mutual fund purchases?
The function of NAV is to provide transparency on the fund's current value, allowing you to track its value and estimate growth. However, a low NAV does not necessarily mean a fund is cheap, nor does a high NAV necessarily mean it is expensive. This is just one of many factors to consider when analyzing a fund's overall performance and potential.
"The biggest misconception among our investor community is that mutual funds should be bought or sold based on high/low NAV, which is not the case. High/low NAV does not indicate the fund's performance. Instead, it simply indicates the unit value at a given point in time. In addition to NAV, you should also consider the fund's performance." - Rishabh Rajvanshi.
What to look for when investing in mutual funds
A fund's portfolio tells you everything about the fund, such as the sectors it invests in, its liquidity, and its management. Additionally, expense ratios, taxes, exit loads, and comparisons with other funds should be considered. However, it's also important to understand the fund's returns, risk-adjusted returns, and return stability.
What are Nav-Based Pricing and Entry Load-Based Pricing?
Nav-Based Pricing calculates a mutual fund's per-unit market value by dividing total assets by total outstanding units minus liabilities. This calculation is performed daily. Investors buy and sell units at the daily calculated NAV. Regarding Entry Load-Based Pricing, it is a charge or fee that is added to the NAV when investors purchase mutual fund units, increasing the total cost of purchase. In order to protect investor interests and promote transparency, SEBI (Securities and Exchange Board of India) abolished this investment method in 2009.
How do dividends affect NAV?
Sometimes, profits earned by mutual funds are distributed to investors in the form of dividends. Dividends are typically derived from the additional returns the fund manager earns for investors, or from dividends paid on investments held by them. However, dividends also impact our investments. When a mutual fund distributes dividends, the NAV is reduced by the amount paid, but this reduction does not mean a loss for investors. Dividends are taxed according to the income tax slab rate and are reported as "income from other sources."
Disclaimer: This content has been sourced and edited from Dainik Jagran. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
