Net asset value (NAV) is the representation of the per share value of a mutual fund. It is the price at which investors buy and sell mutual fund shares to a fund company. NAV can be calculated by dividing the total value of all cash and securities in a given portfolio (minus the liabilities) by the number of shares outstanding.
This value is computed at the end of every trading day based on the closing prices of the securities in the portfolio. The buy and sell orders of all mutual funds are processed at the NAV on a given trading day. The investors however get the trade price only on the following day.
The price per unit of a mutual fund can be found out by dividing the NAV by the number of outstanding units. This makes the NAV a fairly important value to investors.
NAV is mostly used in reference to open-ended fund schemes. An open-ended fund scheme is one which can issue and redeem shares at any time. Such a scheme allows the investor to purchase shares directly from the fund itself as opposed to purchasing from the existing shareholders.
The NAV of such a fund helps to calculate the price of shares and interests that the fund will issue and redeem. This ensures that the investors receive a fair proportion of the funds and on redemption receive their fair share of the fund’s value in cash.
It is also useful in determining whether the shares in a public company are a cheap or expensive investment. This is done by comparing the company’s current market capitalization with its NAV. The current market capitalization is the price at which the market values the company.
NAV is also an index used to evaluate Real Estate Investment Trusts (REITs). REIT is a security that invests in real estate directly through properties or mortgages. It’s similar to how stock is selling at a major market. REITs, like other companies can be private or publicly traded. They can be classified as equity, mortgage or hybrid.
Investing in REITs help reduce corporate income taxes. They are required to distribute a large portion of their taxable income into the hands of investors. They offer investors high yields and highly liquid real estate investments.
Net Asset Value of a fund can be an invaluable tool for a mutual fund investor. However it is one of the most misunderstood financial concepts. The individual investor must understand that the NAV has nothing to do with the future performance of the fund. It is simply the price of a unit of the fund.
It is important for investors to use the NAV of a fund as a tool to help their investment decisions and does not influence his decision to quit completely.
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