Many investors look at mutual fund NAV in the same way as they look at share prices and therefore they feel that many schemes which have higher NAVs to be more expensive. Though there are a number of similarities between stocks and mutual funds, investors should clearly understand the difference between the two. Let us understand what are mutual funds in India and how they work.
As we know Mutual funds pool money of different investors and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a percentage of the holdings of the mutual fund scheme.
Let us understand with the help of an example. Suppose you invest Rs 100,000 in a mutual fund. If the price of a unit of the fund is Rs 10, then the mutual fund house will allot you 10,000 units. If the total money invested in the fund by all the investors is Rs 100 Crores, then each unit (at Rs 10 NAV) will represent 0.000001% of all the stocks the mutual fund has in its holdings. If you have 10,000 units, then your portion of the mutual fund stock holdings will be 0.01%.
The price of a mutual fund scheme unit, also known as the mutual fund NAV, will depend on the value of the underlying securities of the scheme portfolio. The NAV is calculated by dividing the net assets (value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding. Say if the net assets of the scheme is 100 Crores and the total units issued to investors are 70 Lakhs, then the NAV of the scheme will be Rs 142.8571 (1,000,000,000 / 7,000,000 = Rs 142.8571).
What is Mutual Fund NAV
Now let us see some common Mutual Fund NAV myths which can lead you to make wrong investment decisions.
See the details of top dividend paying mutual fund schemes