Net Asset Value or NAV of a mutual fund is the price at which one unit of mutual fund is traded between investors. It’s very easy to calculate. You need to divide the total net value of the assets held by mutual fund with the total number of shares outstanding.
Net Asset Value or NAV = Net Assets / Outstanding Units
Net Assets as shown in the above equation is calculated by subtracting liabilities from the sum total of the market value of all the shares held in the mutual funds portfolio. Based on closing market price of shares in the mutual fund’s portfolio net asset’s value of mutual fund is calculated.
Net Asset Value or NAV = (Value of Assets – Value of Liabilities) / Outstanding units
There is a misconception that NAV or Net asset value of mutual fund means the market value of mutual fund. There is no market value for a mutual fund. When you buy a mutual fund at NAV or net asset value, it means that you bought at book value.
NAV is calculated based on the value of assets in the portfolio. As these assets are traded in market, NAV is calculated at the end of a day after trading in those underlying assets in completed.
For an open end mutual fund, Net asset value or NAV is very crucial to know whether the mutual fund is overvalued or undervalued. At the time of withdrawal, fund owner will be entitled to get the amount based on NAV or net asset value of mutual funds.
In case of closed ended mutual fund, it’s based on the market price. Market price can be below or higher than the NAV or Net asset value of mutual fund.
If a fund is newly launched then the funds will be available for a standard NAV of ten rupees. NAV can be low or high based on number of shares the portfolio has or based on the value of shares.