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Monday, July 22, 2013

Mutual Funds | Net Asset Value (NAV's) - Explained

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Now that you have gone through my previous post explaining Mutual Funds basics and working, if not read it beforecontinuing with this post any further Mutual Funds Investing - Basics | Working | Benefits

Net Asset value of Mutual funds or NAV's (as we popurarly call them) is similar to stock price as both represent price of one share of an investment. eg when a person invests INR 2000 in a Mutual fund with NAV value of INR 20 then he purchases 2000/20 = 100 shares of Mutual fund. There is no other similarity between NAV and stock price then this one.

Calculating the NAV for a mutual fund is not that complex as people might think. Simply add up the current value of all the stocks, bonds, and other securities in Mutual Funds company's portfolio, subtract the manager's salary and other operating expenses, and then divide this amount by the fund's total number of shares. The resulted amount would be value of NAV of this company.

Difference between stock price and NAV
Still there are many differences between Net Asset Value(NAV) and Stock price, which I would try to explain in following points:
1. Stock prices keep on changing entire trading sessions, whereas NAV's are calculated once in a day at closing of the market. If you purchase in early trading sessions then you would get NAV value on closing of that particular day.
2. Stock investors usually invest in share in manner like "purchasing 50 shares of RIL" or "100 shares of TCS" where as while investing in Mutual Funds you get units of NAV's eg if you invest INR 1000 into a fund with NAV of INR50 then you get 20 shares
3. Stocks have a fixed number of shares available. To change its number of shares, a company can either issue new shares or buy back its own shares in the market. By contrast, mutual funds generally have an unlimited number of shares, and the number changes on a daily basis, depending on how many shares investors buy and sell that day
4. Calculating fair price for a stock is much easier when you purchase stocks, while it is much difficult while finding a fair prices in case of mutual funds is very cumbersome process.

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