If you are an investor then you must have also faced the problem of finding out how your mutual fund is performing or determing its value? Then understanding about what is net asset value (NAV) and how to calulate returns for investment in mutual funds can be life saviour for you.
Associating with mutual fund investment return really can increase your mind.Connecting fund mutual return was expected the trail to bring.It’s also a widespread fallacy that low NAV means great returns.In today’s blog column, we will understand what is net asset value (NAV)? how to calulate returns for investment in mutual funds?
Taking it one step further, the guide to calculating returns is provided.After which in turn we can determine whether low NAV really brings high returns like some sites on the internet say.In fact, mutual fund investors now understand that piling your money into a product for two or three years or more just doesn’t pan out well.Thus this is all very crucial knowledge for you so that when you invest in your mutual funds you can be more like the all-seeing seer and less an amateur.
What Is Net Asset Value (NAV)
Net Asset Value (NAV) can be simply defined as the difference between the value of the funds and liabilities divided by the Number of shares or units. The Net Asset Value (NAV) is calculated on a daily basis and includes the market value of securities, cash, and income, less liabilities and expenses.
For open-end funds, NAV is the buy/sell price. For closed-end funds, NAV is compared to market price to determine premium or discount. NAV discloses the value of a fund’s assets and and is used to state performance. Unlike share price or shareholder equity, it is distinct because it bring tangible assets on board However, NAV is a critical measure for investors in estimating the performance and comparative value of a fund.
How To Calculate Returns For Investment In The Mutual Fund?
Let’s say you bought TCS stocks at Rs 25,00,00,000 and after 1 year the value of your assets that is the value of TCS stocks goes from 25 crores to 35 crores that means the market is doing very well. The value of TCS stock has become ₹35 crore. And let’s say you also purchased HDFC stocks which goes from ₹20 crores to ₹25 crores.
And you still have maintained the cash amount as it is so here the value is ₹5 crore This is the value of HDFC And this is your cash component, right! Here is the example of only two stocks but there could be multiple stocks a person can purchase. it can also be multiple stocks.
If you have invested in Hybrid Mutual Funds, then it can be Bonds too. So this is the value of assets units will remain the same. And assumed that the liabilities are negligible the fees of management are relatively very less it is only 2%.
And we have assumed the remaining liabilities are zero so now how do we calculate Net Asset Value (NAV)? You will add all of these, that means 25 crores + 35 crores so it will be 65 crores, dividend by 2 crores, so here your net asset value is ₹32.5 crore after 1 year.
So basically what are your returns You ₹ 25,000, your units will remain the same. Then 32.5 × 1000 units So your amount ₹25000 1 year ago. That now became ₹32,500 so if you withdraw the amount after 1 year then you will get ₹32,500.
So in this way you got 30% returns. Your money increased by 30% so this is your return on investment so long story short it can be said that Net Asset Value (NAV) is the share price as you invest in shares, you see the price of the share.
Similarly, if you invest in Mutual Funds or ULIPs, you will see the value of the NAV. And whenever you buy or sell mutual funds or ULIPs If on any day you buy or sell before 3:00 PM So the NAV of the same day is considered And if you buy or sell after 3:00 PM then NAV of the next day is considered so it is important that one should take these things in consideration as well.
Low Net Asset Value And High Returns?
If you feel, a mutual fund has low NAV, and investing in such units will result in you getting more units, and you will earn more profits due to more units, then you are totally wrong.
Let us understand with an example. Let’s say you have Rs 10,000, the NAV of mutual fund 1 is Rs 100, the NAV of mutual fund 2 is Rs 10. Investing in Mutual Fund 1 will get you 100 units and Investing in Mutual Fund 2 will get you 1000 units.
Let’s say both the mutual funds yielded gains of 30% in the AUM in 1 year. And, now you want to redeem it. When you will do the redemption in Mutual Fund 1, 100 units for Rs 130, you will get Rs 13,000. And, in Mutual Fund 2, as per the NAV of Rs 13, when you will redeem the 1000 units, you will still get Rs 13000.
That means, If NAV is more or less, or you are getting more or less units, is irrelevant. What matters is how much money you are investing, and wherever the Mutual Fund has invested, how much returns they are earning. Irrespective of you holding 1 unit or 10 units, there would be no difference in the profit.