We recently wrote an article about “market cap”. It got me thinking about the Net Asset Value of Mutual Funds as the two are similar indicators for two different types of investments. There is an important question that we need to answer and that is whether or not you should buy mutual funds that have a high net asset value.
Yes, you should buy a mutual fund with a high Net Asset Value. However, you could also buy mutual funds that have a low Net Asset Value. This is because the NAV of a mutual fund does not truly indicate the performance of the fund. It only indicates what each share is worth.
In this article, we have a lot to get through. Some of the highlights of this article include an explanation of what exactly the net asset value of a mutual fund means. We are also going to highlight how you can accurately calculate the net asset value of a mutual fund and then we will get into a whole lot more. So, I suggest reading this article before you make any decisions on your next investment.
What is NAV?
NAV stands for net asset value. It is a metric that is used to calculate the cost of each share of a mutual fund. It is a basic concept. You add up the total assets of a company and then minus its liabilities. After doing all of this, you divide that by the number of shares or units outstanding. Further down in the article, we will teach you how to calculate the NAV of a mutual fund.
If you know as much as you can about the net asset value, NAV, this will help you make better decisions as to whether or not a fund makes for a good investment.
Does NAV of a Mutual Fund Matter?
It is important for you to understand what NAV means. Also, it is extremely important that you know how to work out what the NAV of a mutual fund should be. This is for you, so that you can understand as much about your investments as possible.
However, the NAV of a mutual fund does not matter as much as some people might think. Sure, it is a metric that you can use, but should not be a metric that you rely on completely.
Remember, the NAV is simply the price you are going to pay for each unit. Say for example the NAV of a mutual fund is $250. That is how much you pay for one unit or one share of a mutual fund.
If you invest $25,000 dollars at $250 per unit, this will give you 100 units or shares within that mutual fund.
At the end of the day… The NAV does not directly tie with performance of the mutual fund, it is a breakdown of money that is held within the fund.
Is It Better To Invest In a Fund With A High NAV or a Low NAV?
This is one of the more complicated questions of this article. Investing in either a low or high NAV fund can come with each of its own benefits. The NAV, however, does not really contribute to any problems of a mutual fund.
A high NAV mutual fund means that the fund has a high value of money invested within the fund, this is generally because the fund has more investors and more capital in hand. This means… Funds with higher NAVs are usually more established and trusted funds.
A mutual fund that has a low NAV might be no different from one with a high NAV. It is just cheaper to buy into because the fund holds less assets. However, some of the best investors believe that a fund with low NAV might offer more room for growth in the future.
So, I would say that if you want stability and you want to invest your money in a fund that has a good track record, go with one that has a high NAV.
If you want to invest more aggressively, then go for a mutual fund that has a low NAV. These funds will be trying to increase capital inside the fund, hence be willing to speculate with riskier investments.
It is important to remember that just because a mutual fund has a low NAV, it does not mean that the mutual fund is a worse option than one that has a high NAV.
How To Correctly Calculate The NAV of A Fund
This is where I want you to pay attention. Once you have this formula down, you would be able to work out what the price per unit of a mutual fund should be without even speaking to the fund. As long as their reports are transparent, you should be good.
So, here is the correct way to calculate the nav of a mutual fund.
Net Asset Value = (Total Asset Value – Liabilities) ÷ Shares Outstanding
The total assets of a mutual fund must include all securities, stocks, bonds, properties, any investments. It must include any cash that the fund has available either on hand or in its reserves.
What Does NAV Mean To You as an Investor?
To be honest, there is no reason to over-explain this. We have already gone in-depth as to whether a low NAV fund or a high NAV fund is better. So, in this section, let me just tell you what the NAV means to individual investors.
The only thing that the NAV should indicate to you as an investor is what the price of each unit is going to cost you to buy into the fund.
If you are already invested in that fund, you can calculate the NAV to see how much your units are worth at their current value.
The Difference Between NAV and Market Value
There is not a huge difference between the Net Asset Value of a fund and its market value. However, you will find that some investors will prefer to look at the market value of a fund rather than look at the NAV.
Looking at the market value of a mutual fund can remove a few variables such as cash on hand and debt. Instead, you look at the value of a mutual fund’s investments hence the name “market value”.
looking at the market value requires a little bit more experience because when you do so you have to be the judge of whether or not you want to invest in a mutual fund based on what they own on the market. Effectively… Do their investments match to your goals?
Experienced investors will look at the net asset value and the market value of the fund however the fund will not base its unit price solely on its market value. So, that is something extremely important to remember if you plan on using a funds market value to determine if it is a good investment for you.
You will always have to refer to its net asset value to determine the price of the shares.
What Is NAVPS
You shouldn’t get caught up thinking about the difference between the NAV and NAVPS. This is because there isn’t much of a difference between them. However, when you want to redeem your shares from a mutual fund you will use NAVPS to calculate how much your shares are currently worth.
NAVPS stands for “Net Asset Value Per Share”. You apply the same concept as you would to the NAV when calculating the NAVPS.
It is always important to remember that you need to always use the Net Asset Value Per Share of the previous day. This is because it is all calculated at the end of the trading day i.e. when the stock market closes.
What Increases The NAV of a Fund?
Remember, when you invest in a mutual fund you are not investing in stocks. Instead, you are putting your money in the trust of a fund manager who invests on behalf of the fund.
If the value of the investments that the fund has made increases then so will the net asset value of the mutual fund.
There are other factors that you should consider and these include things such as large amounts of money coming into the fund via investors. Remember, when calculating the nav of a mutual fund, you need to include cash in the value of the fund’s assets.
Large cash injections from investors can affect the funds NAV, but it is mostly down to the value of the assets under control. When the mutual fund returns profits, the NAV increases.
What Decreases The NAV of a Fund?
This is the same concept that we discussed when we spoke about the NAV of a fund increasing. See, when investments that the fund holds decrease in value then so does the net asset value.
I do need to add that mutual funds don’t often see drastic changes in their net asset value. This is because their portfolio is extremely diverse. If one security that they hold starts to do badly, the rest of the securities will balance out. This concept is what makes mutual funds so attractive.
Does NAV Represent The Performance of a Fund?
This is a misconception that I see a lot and it is very dangerous to you as an investor. To understand why the net asset value does not accurately depict the performance of the fund, we need to take a look at both a high net asset value fund and a low net asset value fund.
A mutual fund with a high net asset value might be performing really well. However, it could also be that they just have a lot of stocks, securities, and investments. The total value of those investments, when divided by the number of outstanding shares they have, might just be high due to volume. So, those stocks do not necessarily have to be performing well.
Remember, you can also look at the market value of a fund if you are unsure.
A low net asset value mutual fund might just have less money invested in stocks. Perhaps they own fewer investments, however those investments could actually be performing better than a fund that has a high net asset value.
The Difference Between NAV and Market Cap
I have decided to this section at the end of the article so that you can check out this recent article that we wrote about the market cap. After reading that you should understand the difference between net asset value and market capitalisation.
For the sake of this article, let me briefly highlight the main differences.
The net asset value is usually used when referring to a mutual fund. However, if a firm plans on acquiring a company they would use the same concept to calculate what the company is worth on the market. Obviously, it won’t act as an absolute indicator but it will be one of many that they use.
You will calculate the total assets of a company, minus all of its liabilities and running costs, and then divide this number by the outstanding shares. It is the same concept that we have discussed in this article.
Market cap does not take into consideration all the assets of a company. Instead, you multiply the value of each share by the number of outstanding shares and then you will find out the market capitalisation.
To sum up this article I would say that you should always know what the net asset value of a mutual fund is before you consider investing with them. With that being said, it is not very important. You should start to learn how to take a look at the market value of a mutual fund along with the net asset value.
If you can use both of these indicators as an indicator as to whether or not you feel that a fund makes for a good investment, you will be making smarter decisions. The sooner you get comfortable with all of this, the sooner you will be able to hit the ground running.