Mutual Funds are financial tools that help the investors to pool their money in various schemes to gain interest and get other benefits also like tax benefits. Net Asset Value means the fund’s per-share market value. It is the price at which investors purchase shares from various fund companies and sell them(redemption price) to fund companies. It is derived by adding all cash value and adding any security deducting liability and divided by the number of shares outstanding. At the end of each trading day based on closing market prices of the portfolio liabilities, Net Asset Value computation is undertaken. The price per unit of a fund is calculated by the number from Net Asset Value, so the number is important for investors. By dividing the Net Asset Value of a fund by the number of outstanding units, you are left with the price per unit.

How Mutual Fund Shares differ from stocks?

This pricing for the trading of shares in a mutual fund is significantly different from that of common stock issued by a listed company on the stock exchange. In this instance, the company uses various methods to issue shares i. e. Initial Public Offering(IPO)  and offer subsequent additional offerings, which are then traded in the secondary market. In the secondary market, the prices are decided by the market forces of demand and supply and the prices of the stocks are solely based on market sentiments. A mutual fund’s performance is not judged by Net Asset Value but by calculating the total return.

Misconception about Net Asset Value

This misconception arises from the perception that if a fund is of Rs 10, then it is cheaper than  Rs 15 or Rs 100. However, this perception is totally not correct and investors would be much better off if they accept this fact.No matter what their Net Asset Value is, two funds with the same portfolio are the same. Net Asset Value is immaterial. Why people carry this perception is because they assume that the Net Asset Value of a Mutual Funds is similar to the market price of an equity share. This, however, is not true.

Calculation Of Net Asset Value

Mutual Funds are mainly divided into two categories- securities and cash. Securities include both stocks and bonds and the total asset value of the fund included its stocks, cash, and bonds at market value which also included interest and dividends earned and liquid assets. Whereas liabilities include debts owed to creditors and other accrued expenses. In short, Net Asset Value =  Assets – Debts/ Number of units outstanding, where Assets = Market value of mutual fund investments + Receivables + Accrued Income and Debts = Liabilities + Accrued Expenses. The market value of stocks and debentures is usually the closing price on the stock exchange where they are listed.

What do the daily changes in Net Asset Value indicate?

Daily changes in the Net Asset Value of a mutual fund scheme indicates a rise or dip in the assets of the scheme. However, financial planners tell investors, that when they select a mutual fund scheme for their investments, daily changes in the Net Asset Value of the scheme do not matter. Investors should look at the annualized return of a fund over different time frames to judge its performance.

Some points to Note

As per the Securities Exchange Board of India’s guidelines, all the Mutual Funds are required to publish their Net Asset Value on every business working day. So every accounting firm needs to calculate the Net Asset Value of a Mutual Fund.  Since mutual funds depend on stock markets, they are usually declared after the closing hours of the exchange. Also, the expense ratio is subtracted to get the Net Asset Value. The expense ratio is the total of all expenses made by the Mutual Funds annually  including the operating expenses and the management fees, distribution and marketing fees, transfer agent fees, custodian fees, and audit fees

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