Understand Net Asset Value (NAV) of Mutual Funds

Introduction of NAV

For the general well-being of the market and a suitable financial domain for the investors, it is essential that an efficient financial system should be in place. Therefore, an efficient financial system is necessary for the economic development of a country as it encourages savings and investment, allocates scarce resources to different productive channels and accelerates the rate of economic development. The role of financial intermediary helps to realize the opportunities for savings and real investments in the economy as a mediator between savers and borrowers. 

This process of intermediation not only brings about transparency but also ensures that there is a credible flow of information and relevant data. This creates ideal conditions where the funds of the general public are safe and investments are circulated in a manner that is beneficial for both the overall market and for the general investors. This is very much true for a fast developing and evolving market like ours.

Ultimately in the Indian perspective, opening up of the economy was done with a view towards integrating the Indian market on a global note. Besides, this increased accountability in the market operations of financial intermediaries and brought controls and various regulations that put a stop to blatant monopolization of available resources. The reforms in the financial sector have enhanced the scope of access to international capital markets and the flow of international savings into our country for integrating the Indian markets with global capital markets. However, with this, the importance of having a well-regulated and credible economic expertise also becomes essential. 

There are large numbers of small investors who are keen to make an investment in the capital market but they lack professional expertise to face the bull and bear as they are unable to predict the market conditions. Mutual funds play a crucial role in the mobilization of savings from investors and efficient allocation of resources in the economy.
It is clear that the investors require maximum returns and reduce the risk by diversification. By investing in equity shares or debentures through mutual funds, the risk is reduced. It also meets both the objectives of investors to earn income and capital gains. The mutual funds undertake extensive research of the economy, industry and companies and supervise them constantly. 

The professional fund manager will invest the funds or liquidate the investments at the proper time which an individual investor can‘t afford. Listing of funds at their Net Asset Values (NAVs) also ensures a rich in-flow of funds from investor sections. The terms and conditions are flexible and if investors invest in mutual funds, they can‘t fall prey to misleading and motivating tips. This is the direct result of core competence and the diverse informational analysis that should ideally be an essential first step in making investment decisions.

What is NAV of MF & NAV of SIP

Investment in any mutual fund option involves investment decisions balancing the sources and uses of funds. This allows an investor to clearly understand the specific requirements and also allows him the requisite flexibility in terms of enhancing the overall portfolio that he has in the market. However, to provide the much-needed liquidity to investor closed-end funds list on a stock exchange. An investor thus has to study both the flexibility as well as the economic viability of the fund that he/she has chosen as an investment vehicle. The fund‘s units may be traded at a discount or premium to NAV based on investors‘ perceptions about the funds' future performance and other market factors affecting the demand for or supply of the funds' units. 

From the investor‘s perspective, it is important to note that loads are not charged only by open-end funds; even a close-end fund can charge a load to cover the initial issue expenses. It is also important to note that there are other expenses such as the fund manager‘s fees, which are charged to the investors on an on-going basis. Such expenses reduce the NAV of the fund. If the investor‘s objective is to get the benefit of compounding his initial investment by reinvesting and holding his investment for a very long term, then a no-front load is preferable. The volume of allotment of fund options is dependent on the buying price or the offer price. This rightly involves a matching between the price that a seller is seeking and the price that a genuine buyer is willing to pay. When the investment matures in due course of time, cash flows start coming in and accumulating, leading to a point of time where the accumulated profit equals the original investment. 

Advantages of looking at NAV

It is mandated that each mutual fund shall compute the Net Asset Value (NAV) of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. Also, it is mandated that every mutual fund shall compute and carry out the valuation of its investments in its portfolio and publish the same in accordance with the valuation norms specified in the eighth schedule. The NAV details are required to be informed to the general public at large and this ensures a high degree of transparency in the valuation and hence affects the investment decisions of willing investors.

The equity investment in a company by mutual funds should be limited to 10 percent of the net asset value (NAV). This is obviously subject to changing paradigms and the multi-faceted growth in the general scenario of Indian markets and the way trade deals are conducted. Going by industry standards, these recommendations offer different exceptions to equity investments vis-à-vis NAV. These exceptions are segmented and as such, vary from one industry to another, although there is no variation in the central theme of such exceptions. 

Besides, there have been efforts to regularize the entire structure of equity investment and its valuation in relation to NAV. Updated rules have now regularized the many factors pertaining to the NAV of a fund option. This has brought in standardization of norms for valuation of assets, computation of Net Asset Values (NAVs) of schemes of mutual funds and accounting standards and policies.

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