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To create wealth in the long run, one of the most popular options is Mutual Funds. However, sometimes intricating terms related to Mutual Funds make it difficult to understand Mutual Funds, whereas understanding Mutual Funds is not that tough. To solve this problem, we are starting to publish a series of articles where we will discuss the terms related to mutual funds in a simple and easy-to-understand way. Hello friends. Welcome to our blog Create Wealth with Avik.
What is NAV in Mutual Fund
When an investor invests in a Mutual fund, he/she is assigned a ‘Unit’ of that mutual fund. In layman’s terms, this ‘Unit’ can be understood as a part of a mutual fund. This ‘Unit’ has a value. This value increases/decreases as per movements in the market. In simple language, the amount one has to pay to buy one unit of a mutual fund is called NAV or Net Asset Value.
This is like the price of stocks. When we invest in stocks, we accumulate stocks in different quantities. For example, let’s say, the current stock price of Company A is Rs. 100 and you invest Rs. 1000 in that company. Hence, you will get (1000/100) = 10 quantity of stocks of Company A. nav of mutual fund is similar to the quantity of stock. Let’s, understand this with an example.
- Suppose, you want to invest Rs. 10,000 in a Mutual Fund. Let’s assume that the current NAV of that mutual fund is Rs. 25. Hence, on putting your Rs. 10,000 in that mutual fund, you will get (10,000/25) = 40 units of that Mutual Fund. Your investment amount in this mutual fund will grow in proportion to your invested amount and the units you bought.
The price of NAV increases/decreases as per the performance of the mutual fund. Like in the case of stock, price appreciation creates wealth for the investors, in mutual funds, the increased value of nav does the same thing.
- Suppose, in June 2020 you bought 1000 units in Canara Robeco Small Cap Mutual Fund. Then, the nav of that mutual fund was Rs. 9. Hence, to buy 1000 units, you invested Rs. 9000. As of 31st May 2022, the nav of Canara Robeco Small Cap Mutual Fund was Rs. 25.69. Hence, within just two years, you would have gotten a return of (1000*25.69) – (1000*9) = Rs. 16,690.
Through the below picture, you can understand, how the nav of Kotak Emerging Equity Fund moved.
NAV Formula in Mutual Fund
The formula of nav in the mutual fund is as below: –
NAV = (Assets – Liabilities) / Total number of outstanding shares