What is NAV (Net Asset Value)?

After understanding the basics of mutual funds, and different types of Mutual Funds, we shall now discuss how mutual funds are priced. Let’s walk through all the required elements to understand Net Asset Value (NAV) and its significance on dividends and growth funds. This will also help us in discussing the process of calculating it.

Key Points:

  1. NAV plays an important role in calculating the valuation of the mutual fund. All of the buy and sell orders for mutual funds are processed at the NAV of the trade date. The NAV is impacted when the assets, liabilities and the number of shares change.
  2. When a mutual fund pays you the dividend, the NAV of a mutual fund reduces.

NAV plays an important role in calculating the valuation of a mutual fund. So, it is obviously important to have a sound knowledge about it. Before going through the details of NAV, let’s do a quick review of basics of mutual funds.

Getting into details of ‘Net Asset Value – NAV’

The NAV of a fund is calculated each day according to the closing prices of the stocks in the fund’s portfolio. The “asset” is the total value of the shares in the portfolio. “Liabilities” include short-term and long-term liabilities, plus all the expenses, such as employee salaries, utilities, and other miscellaneous expenses.

The NAV is impacted when the assets, liabilities and the number of shares change. An increase in asset (stock prices) increases the NAV, and when the liabilities witness a growth, the NAV decreases. It’s as simple as that.

How Dividends Affect NAV

When a mutual fund pays you the dividend, the NAV of a mutual fund reduces. The above statement doesn’t mean that after dividend distribution, one suffers a loss. The process of distributing dividends goes like this – the mutual fund you are invested in has invested your money in a number of securities; when these securities offer dividends, they distribute the dividends to you.

You must keep in mind that during the process of dividend distribution, the NAV of the mutual fund reduces; but, it doesn’t mean you are facing any loss – that money has simply come to you directly. You can also choose to reinvest those dividends to buy more shares of the mutual fund.

The primary goal of a growth fund is capital appreciation. If you are investing in growth funds; you will not receive any dividends from them. These mutual fund schemes are designed to reinvest these dividends which are issued by the stocks in their portfolio. These schemes include those companies which do not pay out dividends at all. The money that is earned is reinvested in the company’s growth and R&D (research and development).

Wrapping Up

  • Given the fact that NAV is the current value of your fund, it doesn’t tell you the whole story.
  • If you want to calculate the total return on your fund, you can calculate it by percentage growth of NAV over a given period of time.
  • Appreciation and fund distribution together give you the true return on investment of a mutual fund.
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