Net asset value or NAV is generally associated with mutual funds and is used by investors to determine the market value of each share of a particular mutual fund. Mutual fund houses and unit investment trusts calculate their NAV at the end of every business day.
What is Net Asset Value?
Net asset value of an investment company is the net value of a company. For companies, the difference between the assets and the liabilities is defined as net assets or net worth of the company.
For example, if a company has total assets worth $200 million and liabilities of $10 million, the company’s NAV will be $190 million. Depending on the change in a company’s assets and liabilities, the NAV changes accordingly.
Net asset value = Value of assets – value of liabilities
- Value of assets indicates the value of all the securities.
- Value of liabilities indicates value of all liabilities and expenses (such as operational expenses, staff salaries, audit fee etc.).
Net asset value in mutual fund
As mentioned above, the term ‘net asset value’ is commonly associated with mutual funds. Investors can assess the performance of a mutual fund scheme indicated by NAV or net asset value. A fund’s NAV represents the per share value calculated for a mutual fund or ETF. In other words, NAV is the price that investors need to pay for the units of the mutual fund scheme.
The NAV of a single share (or ‘per share NAV’) is calculated by dividing the difference between assets and liabilities by the number of outstanding shares.
Net Asset Value Formula (Per share)
Per share NAV = Value of assets – value of liabilities/ Total shares outstanding
For example, if a mutual fund has an NAV of Rs. 10 crore, and investors own Rs. 1 crore of the fund’s shares, the funds per share net asset value will be Rs. 10.
Let’s assume that a mutual fund has a total investment of Rs. 10 cr in different securities and Rs. 70 lakh in total receivables. The fund has Rs. 35 lakh short-term liabilities and Rs. 10 lakh long-term liabilities.
The mutual fund has Rs. 1 cr shares outstanding. Using the formula above, the net asset value per share would be:
= [(Rs.100000000 + Rs. 7000000) – (Rs. 3500000 + Rs. 1000000)] / Rs. 10000000
= Rs. 10.25
Hence, the fund’s per share NAV will be Rs. 10.25.
Since per share NAV depends on the NAV of mutual funds and on the number of shares held by investors, both of which change on a daily basis. As a result, per share NAV also changes daily.
Assets and liabilities in NAV for mutual funds
Unlike stocks, mutual funds don’t trade in real-time. NAV is calculated after market hours each day on the closing market prices of the portfolio’s securities. They are calculated based on various assets and liabilities.
Cumulative market value of a particular fund’s investments, cash and cash equivalents on hand, receivables and income accrued, etc. are included in the asset section of mutual funds. Market value of the securities is calculated after market hours each day based on the closing price of various securities in the fund’s portfolio.
In calculating the NAV, short-term and long-term liabilities include outstanding payments, debt owed to lenders and associated entities; foreign liabilities like shares for non-residents, payments to foreign partners, and other pending sale proceeds; and other liabilities like staff salary, administrative charges, expenses related to distribution.
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