Here’s an easy way to calculate NAV
You may be investing in mutual funds, be it a growth fund or a dividend fund, one thing that is common for all the mutual funds is NAV.
What is NAV?
Is it imperative to track NAV?
Does NAV matter?
In this article, you will learn what is NAV, why you should care about it, and how to use the power of compounding calculator.
What is NAV?
NAV is also known as Net Asset Value. It is the net value of the fund.
What does it mean?
Net, in simple terms, means what is left after subtracting assets and liabilities.
So the NAV of a fund is the actual value of the fund after you subtract the fund’s assets and liabilities.
It represents the price of a single unit of the fund. NAV is the price at which the fund gets itself registered in the exchange
Understanding Net Asset Value
The net asset value (NAV) is the term used to describe the accounting value of a company or business entity. It is typically derived by subtracting all liabilities from all assets, resulting in a net number representing the difference between assets and liabilities.
Theoretically, any suitable business entity or financial product dealing with the accounting concepts of assets and liabilities can have a NAV. In the context of companies and business entities, the difference between the assets and the liabilities is known as the net assets or the net worth or the company’s capital.
The term NAV has gained popularity concerning the fund valuation and pricing, which is arrived at by dividing the difference between assets and liabilities by the number of shares/units held by investors. The fund’s NAV thereby represents a “per-share” value of the fund, which makes it easier to be used for valuing and transacting in fund shares.
It is often the case that NAV is close to or equal to the book value of a business. Companies with high growth prospects are traditionally valued more than NAV might suggest. NAV is most frequently compared to market capitalisation to find undervalued or overvalued investments
The formula for a mutual fund’s NAV calculation is as follows:
NAV = (Assets – Liabilities) / Total number of outstanding shares
Understanding with an example
Let us suppose that a mutual fund invests $200 million in different securities, which is calculated based on their closing prices on each given day.
Cash and cash equivalents amount to $5 million, and receivables are $2 million. The day’s accrued income amounts to $105,000.
Short-term liabilities amount to $15 million, and long-term liabilities amount to $4 million. The day has accrued expenses of $20,000.
Shares outstanding amount to 7 million. Calculating NAV according to the above formula is as follows:
NAV = (Assets – Liabilities) / Total number of outstanding shares.
Here the assets are
- $200 million investment
- $5 million cash and cash equivalents
- $2 million cash receivables
- $10500 everyday income
While the liabilities are
- $15 million short term liability
- $4 million long term liability
- $20000 everyday expense
= [($200,000,000 + $5,000,000 + $2,000,000 + $105,000) – ($15,000,000 + $4,000,000 + $20,000)] / 7,000,000
= ($207,105,000 – $19,020,000) / 7,000,000
Hence this fund’s NAV comes to $32.30.
The NAV is also “the per-share value” or just “the price per share.”
When expressed at a per-share value, it represents a fund’s per unit market value. The per-share value is the price at which investors can buy or sell fund units.
When the value of the securities in the fund goes up, the net asset value goes up. Conversely, when the value of the securities in the fund goes down, the NAV goes down: If the value of protection in the fund increases, then NAV increases; if it decreases, then NAV decreases.
Mutual funds are a convenient way to invest in many different securities without buying them individually. However, mutual funds can also be complex, and it is crucial to understand how they work.
Understanding how mutual funds work can help you make informed decisions about your investments. For example, it is essential to understand that looking at each fund’s NAV (net asset value) and comparing it to others does not offer any insight into which fund performed better. Similar to share prices, a high share price does not indicate a “better” stock.
As far as determining which fund is better, it is essential to look at the performance history of each mutual fund, the securities within each fund, the longevity of the fund manager, and how the fund performs relative to a benchmark.
Power of compounding calculator
A compounding calculator is one of the best tools to understand the time to reach your financial goals.
The power of compounding calculator is unknown to many & has the following fields.
- Initial investment –
You can put any amount to get started with the compounding calculator. The initial investment is the first contribution you will make towards the funds.
- Monthly contribution
How small amount are you willing to invest every month. If you are not keen on monthly investment, you can leave this field blank and put your amount as lump sum in the initial investment field.
- The rate of return
How much return are you expecting? The return can range from 8% to 15%.
Usually, the mutual funds have outperformed the index clocking an average 14-15% return per annum.
- Compounding frequency
You can set the desired frequency of the compounding. Usually, compounding happens yearly, but it takes place half-yearly in some plans.
You can utilise the power of a compounding calculator to plan out your wealth creation journey and smash all of your financial goals.
In this article, we learned what is NAV? and its importance. In financial planning, it is vital to understand the nuances of technical concepts to make informed and wise decisions for our good.