What is Net Asset Value: Which day’s NAV is used while buying or redeeming mutual funds? In the third part of this series, Riju Mehta explains Net Asset Value and how it is calculated
Net Asset ValueNet Asset Value or NAV is the cost of a single unit of a mutual fund. This is the price at which you buy or redeem units in a mutual fund.
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A mutual fund holds various assets on behalf of the investors, depending on its defined objective and equity/debt category. These can include shares, bonds, money market instruments, cash and derivatives.
It also has liabilities in the form of operational expenses and costs. These can include management fees, taxes, administrative charges, etc.
When you subtract the liabilities from the total value of assets and divide it by the total number of units in the mutual fund, you get the NAV.
How is NAV calculated?
This means that if you want to invest Rs.10,000 in a mutual fund, you will be assigned 102.5 units at an NAV of Rs.97.5. On the other hand, if you want to redeem 100 units from the fund, you will get back Rs.9,750.When is it declared?
The NAV for every mutual fund is declared at the end of the day since the value of stocks is available only after market closing at 3.30 pm. Unlike the value of stocks, which can vary every minute, the NAV varies on a daily basis and is displayed on the mutual fund and Amfi websites before 11 pm every day.
What does NAV mean for investors?
The NAV simply indicates the price at which you buy or redeem the mutual fund units. It does not reflect the performance or returns of the mutual fund. You can, however, use it to track the growth or past performance of a fund. For instance, if the NAV of a fund was Rs.10 at the time of its launch and rose to Rs.100 10 years later, it would indicate a rise in the fund’s corpus and, hence, an increase in the number of investors subscribing to the fund. It will, however, not indicate the returns of the fund over the past 10 years.
Which day’s NAV is used while buying or redeeming?
The price at which you buy or redeem fund units will depend on the time at which the amount is received by the mutual fund, not the time at which you place the request, and is known as realisation-based NAV. The cut-off time has been fixed by the market regulator, Sebi, as 1.30 pm for liquid and overnight funds, and 3.30 pm for other debt and equity funds. If the amount is received before this cut-off time, the NAV of the same day will apply, and if it is received after this time, the NAV of the next day will be applicable.
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This story originally appeared on: India Times - Author:Faqs of Insurances
