What is a Net Asset Value? How Is It Calculated?

Over the years, several new investment options have been introduced. However, Mutual Funds continues to be the go-to option for most investors to date. The fund draws financial resources from investors like you and invests in various assets. You can invest in Equities, Debts, or both depending on your investment goals and risk appetite. You can invest in Mutual Funds via Systematic Investment Plans or make Lumpsum Investments.

Recently, the invest in SIP mode has become very popular. SIPs allow you to build your corpus over time by making small, periodic contributions as per your affordability. Now, Net Asset Value is a common term associated with Mutual Funds. Let us understand the meaning of NAV, calculation methods, relevance, and its association with SIP mode.

What is Net Asset Value?

NAV is the market value per share held in your Mutual Fund portfolio. It is calculated by subtracting liabilities from total asset value divided by the total number of outstanding shares in the market. Typically, most Mutual Funds NAV begins at Rs. 10 and gradually increase as the fund grows in the market. A fund’s NAV differs based on the investment mode opted for. If you have made Lumpsum Investments, calculating the fund’s NAV is easy.

If you have opted for SIPs, the fund’s NAV increases periodically. This is because the assets get added to your portfolio as and when you make SIP contributions.

What is the formula for calculating Net Asset Value?

As mentioned, Nav is calculated by subtracting liabilities from total asset value divided by the total number of outstanding shares. The formula can be expressed as:

NAV = (Total assets value – liabilities) / Outstanding shares

Here,

• Total asset value indicates the value of securities held. It can be any security: Equities, Bonds, or Debentures. Include the dividend and interest payments too.
• Liabilities refer to outstanding payments and fees.

What are the various methods for calculating Net Asset Value?

There are two methods to calculate NAV:

• Daily net valuation of assets

Here, your investment portfolio’s NAV is determined daily after the market closes. When the market reopens the following day with the closing prices of the previous day, the stockbroker deducts all expenses to get the accurate NAV for the day using the mentioned formula.

• General calculations

Under general calculations, NAV is the price of its Equity shares and is given by the cumulative cost of individual shares. The market value of assets calculated here is subject to changes as per market fluctuations.

How is Net Asset Value relevant to investors?

NAV illustrates the performance of the fund’s underlying assets. Maximum investors confuse a fund’s NAV to be a stock price. Due to this, they invest in a fund that has a lower NAV, hoping that it will perform well in the markets. However, that is not at all the case. NAV has not relation with the fund’s performance.