Whether you are a beginner mutual fund investor or an experienced one, you inevitably come across the abbreviated term ‘NAV’. You may try hard to keep the investment jargon at bay, but this one term seems to crop up a lot. For example, when you buy and sell mutual funds, you need to know what is NAV and NAV importance in a mutual fund. In this article, we discuss everything there is to know about NAV including what is NAV and how is it calculated.
What is NAV?
NAV stands for Net Asset Value of a fund. Based on this net asset value, the asset management company and investors both can keep a count on the number of units the investors hold in a fund. Net asset value denotes the price of each unit of a mutual fund.
Now that we know what is NAV, let us see what is NAV Value in Mutual Funds.
What is NAV Value in Mutual Funds?
The NAV per unit is the market value of securities divided by the total number of units of the scheme. To put simply, the performance of a particular mutual fund scheme is denoted by its NAV. Mutual funds collect money from several investors and invest it in the securities market. Since the market value of securities fluctuates every day, NAV of a mutual fund scheme also changes on a day to day basis.
Generally, mutual funds begin with a unit cost of Rs. 10 and as the fund’s assets under the management grow, the price keeps rising.
What is NAV and How Is It Calculated?
NAV computation is undertaken once at the end of each trading day on the basis of the closing market prices of the portfolio’s securities. Let us understand what is NAV and how is it calculated in this section.
• General Net Asset Value Calculation
Suppose, a mutual fund scheme has a NAV of Rs. 500. So, if you want to buy one unit of that mutual fund you will need to pay Rs. 500 for it. Conversely, assume you invest Rs. 5,000 in a mutual fund scheme which has an NAV of Rs. 500. It will allow you to buy 10 units of that fund.
• Daily NAV Calculation
Once the market closes at 3:30 p.m., all mutual fund companies estimate the worth of their portfolios every day. The market opens the next day with the previous day’s closing share prices. The fund house or asset management company subtract every payable to calculate the NAV of the day. The asset value of the fund is arrived at after deducting the daily expenses to manage a fund.
The day’s cost per unit is calculated by dividing the total asset value by the number of units issued so far. Since most of the funds are open-ended, fresh withdrawals and new investments can impact the units. If the fund manager deems fit, they can sell some shares or put in an additional sum.
Is There Any Myth About NAV?
Many investors think that if they invest in a fund with lower NAV, they have a better scope for a price increase and those that already have a higher NAV may not have the scope for a price increase. This compels them to invest in a scheme with lesser NAV.
For example, you get units allotted at NAV 10 if you invest in NFO. But, if you invest in a fund which was launched 3 years ago and has an NAV of 50, you will earn lesser profits comparatively. This is not true.
The performance of any mutual fund is dependent upon the performance of the securities involved in the portfolio. Plus, NAV is a combination of costs such as management fees, distribution fees and the expense ratio of the fund manager. The chances of growing your money depend completely on the market situation, the quality of securities in the portfolio and the fund manager's performance.
When we buy a mutual fund at its NAV, we buy it at its book value. But what we really should be buying in a mutual fund scheme is its performance and not its NAV. This is why it is essential to keep a track of past records of a mutual fund’s performance and compare its returns over similar periods.
What is NAV In SIP (Systematic Investment Plans)?
NAV in SIP is the same as the NAV of a mutual fund. SIP and lump sum are two methods through which you can invest in a mutual fund scheme.
SIP involves investing a fixed amount of money every month in a mutual fund of your choice. The amount gets automatically deducted from your bank account every month. Thus, it is regarded as a disciplined approach to investing in mutual funds. This is usually preferred by salaried investors looking to force save every month.
On the other hand, lumpsum investment involves investing a large amount of money in a mutual fund scheme at one go. This is usually preferred by investors who have a surplus of cash ready to invest.
So, no matter which method of investing in the mutual fund do you opt for, the characteristics remain the same. NAV in SIP and NAV of mutual funds via lumpsum investments remains the same.
It is advisable to look at the fund’s total return instead of only tracking the changes in its NAV to judge the overall performance of a mutual fund. Also, you may look at the historical performance and current cost among other parameters before investing in a fund. If you need any assistance to invest in the mutual fund market, you may contact IndiaNivesh Ltd. We can help you select the right mutual funds for your portfolio based on your investment horizon and financial goals.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
SIP Investment - Why Should You Increase Your SIP Every Year
Whenever people begin their investment journey, they secretly wish to become millionaires, almost overnight. However, to effectively create wealth you need years of consistent investing at a gradual pace. Investments need time and also a boost from time to time to grow. Mutual funds are an effective investment tool to build a corpus. When it comes to investing in mutual funds, Systematic Investment Plans (SIPs) are a convenient option. In this article, we look at SIP investments and how increasing your online SIP investment every year can be beneficial to you.What Are SIP Investments? Many investors think of SIPs and mutual fund schemes as synonyms, however, that is not the case. SIPs are merely tools that allow you to invest in a mutual fund scheme over a period of time. It can be monthly, quarterly or semi-annually depending on your financial goals. It acts as a convenient option for salaried individuals to regularly invest in mutual funds. The money can get deducted from their account automatically thereby engraining a financial discipline. Most mutual fund managers advise investing through SIP investment plans rather than lumpsum investments. This is because SIPs help you to average your purchase cost and maximise returns. Since you invest regularly over a period irrespective of how the market conditions are, you automatically end up buying fewer units when the market is high and vice versa. This helps to average out the purchase cost of your mutual fund units.How To Start SIP Investment? You can start an SIP with a minimum amount of Rs. 500. Here is how to start SIP investment if you wish to buy mutual funds. • Basic InformationThe first step of SIP investment requires you to provide all your basic personal information in an online form such as your name, date of birth, address, mobile number, etc. • Upload DocumentsIn the next step, you are required to upload a scanned copy of your PAN card and address proof. • Video CallNext, you are required to complete the IPV or In-Person Verification by selecting a time slot which is convenient for you. This requires confirming your physical existence through a webcam video call. It is advised to keep your address proof and original PAN card handy as you will be asked to show it during the video call. • Aadhar Based eKYCThe above procedure for SIP investment can be simplified if you have an Aadhar card. You have to enter your Aadhar number and authenticate it with a One-Time Password (OTP). This will pre-populate the online form with all your basic information details available in the UIDAI database. IPV through a video call is not required if you complete the eKYC procedure through Aadhar as the UIDAI database already has your biometric information. However, there is a statutory limit which will not allow you to invest more than Rs. 50,000 per fund house in a financial year if PAN card details are not submitted by you. You can submit your PAN card and enhance this limit. • The Final StepLastly, visit the website of IndiaNivesh Ltd. and register for a new account. Keep your phone and cheque book near you as you would be required to verify your account through OTP and enter your bank details. Once the account is created, you can log in and choose the mutual fund scheme you are interested in. Choose the SIP date and submit your request.Benefits of Increasing Your Online SIP Investment Every Year Here are some advantages of increasing your SIP every year.• Builds A Bigger CorpusWhen your income and surplus increase every year, it makes sense to increase your SIP investment too. It adds to the power of compounding and helps accumulate greater wealth by building a bigger corpus. Even a small 5% to 20% increase in the SIP investment plan at the end of 10, 15 or 20 years can make a big difference. In addition, you can avoid increased documentation as it will reduce the necessity of creating and tracking multiple stocks. • Counters InflationWhile investing, the return adjusted for inflation is a significant factor to be considered. As inflation increases every year, the amount you find substantial today may not have the same worth some years down the line. Hence, if you do not increase your SIP investment amount every year, you ignore inflation which erodes the purchasing power of your hard-earned money. • Achieve Your Financial Goals FasterSuppose you start a SIP investment plan of Rs. 5,000 per month. Assume an annual return rate of 12%. After 10 years, your corpus would grow to be Rs. 11.6 lakhs. However, if you decided to increase your SIP contributions by 10% every year, after 10 years your corpus would grow to be Rs. 16.8 lakhs. That is a difference of over Rs. 5 lakhs. As the years multiply, the difference would be a lot more.How To Increase Your Online SIP Investment? Here are three simple ways by which you can increase your online SIP investment.• Select The Right SchemeIf you are interested in SIP investment plans that allow step-up option where you can enhance the amount regularly, ensure that it matches your risk profile. For example, if you are an aggressive investor, you can opt for a mid-cap equity fund. Or, if you are a conservative investor, you can look at balanced funds. • Determine The FrequencyYou can choose the frequency and the amount by which you want to increase your SIPs. It can be semi-annual or annual. An appraisal or bonus is the best time to start increasing your SIPs. It is always a wise decision to align your additional earnings to existing financial goals. • Identify Your Investment CapYou can decide to put a cap on the maximum amount of money you wish to invest every month in SIPs. When you choose this option, your SIPs can keep increasing till they hit the ceiling amount set by you. Once this maximum limit has been hit, the SIP then acts as a regular SIP with the same investment amount every month. SIPs allow you to invest periodically and help your wealth grow. You can achieve your long-term financial goals with regular small investments and gradually increase your SIPs every year to achieve your financial goals sooner. You can either increase your SIPs by a fixed amount or a certain percentage, depending upon your financial goals. You may contact IndiaNivesh Ltd. if you wish to start a SIP investment plan. We can help you choose the right mutual fund schemes based on your financial goals, risk tolerance and investment horizon. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
How does Share Market Work in India?
There are many investment avenues available for individual investors. Right from fixed income options to equity-related products, there can be many options to choose from, depending on investors’ risk appetite and time horizon. Though the share market is a popular investment choice, many individuals don’t understand how share market works. Given the technicalities involved, it is not surprising. So, let’s breakdown the concept of share market and understand how share market works.What is the share market?In the simplest of terms, the share market is the platform that allows investors and traders to buy and sell shares, derivatives or bonds. The share market, therefore, acts as a middleman between the investors and the companies offering their securities for sale.Participants of the share marketBefore understanding what is share market and how it works, it is important to understand the participants which constitute the share market. A share market has four main participants which are as follows –1. SEBI – The regulatory bodyThe Securities and Exchange Board of India (SEBI), is the head of the share market which acts as its regulator. It lays down the rules of the share market and the market participants, as well as the traders and investors, have to follow the rules and guidelines prescribed by SEBI. SEBI also governs and monitors the working of the share market and ensures that the market works as per the prescribed guidelines.2. Stock Exchange – The platformStock Exchange is the place where the shares and derivatives are listed and traded. There are two stock exchanges in India – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).3. Brokers – The middlemenBrokers are individuals or companies who are authorized to conduct buying and selling of stocks and derivatives listed on the stock exchange on behalf of their clients. For rendering their services, brokers get a brokerage on the amount that they transact.4. Investors and traders – The playersInvestors and traders are the final participants who buy and sell securities on the stock exchange. They can be an individual or a company.How share market works?Now that you know the important participants of the share market, it is time to understand how share market works. The following process is a step-by-step guide to the workings of a share market: There are two stock markets – primary and secondary. To be able to trade its securities on the stock market, a company has to get listed on the primary stock market. This listing is done through an IPO (Initial Public Offering) wherein the company offers its stock to the public to trade for the first time. The company is required to issue an offer document containing the details of the IPO, the company details, the stock being issued, etc. The company would also have to register itself with SEBI and the stock market. Once the company is successfully listed, it's stock trades on the secondary market. The secondary market is the platform wherein the traders and investors buy and sell stocks of the listed companies. Since there are thousands of investors who want to trade on the listed securities, it becomes impossible for them to assemble at one platform for trading. That is where brokers come into the picture. Brokers represent a set of investors and trade on their behalf. Brokers are also registered with the stock exchange and serve as an intermediary between the participating company and the investors. If you, as an investor, want to buy a particular stock at a particular price, you have to communicate your purchase desire to your broker. The broker would then process your order on the stock exchange. Your broker lists your purchase order on the exchange which, in turn, searches for a seller willing to sell the stock that you want. When the seller is found, a price is fixed and the exchange informs the broker of the confirmation of the purchase order. The broker then informs you and you need to pay the money to purchase the requested stock. The details of the buyer and seller are also confirmed by the exchange to ensure that an authentic transaction is taking place and that there would not be any default by either of the parties in buying or selling the stock. Once the records of the buyer and seller are recorded, the exchange starts the process of transferring the ownership of the stock. This process is called settlement and it takes T+2 days for the actual transfer to complete. This means that, if you request to buy a share today, the share would be bought and deposited in your Demat account the day after tomorrow. It is also the responsibility of the exchange to ensure that the purchase goes through without any default. It ensures that the buyer gets the desired number of shares after paying for them. The trading of the stock also impacts its price. The share market is volatile wherein the stock prices rise and fall on a continued basis. This rise and fall are due to the theory of demand and supply and the perception of the participating company which investors have. If investors perceive a company to be very profitable, they would be motivated to buy the shares of such a company. This would increase the demand for the company's shares. As the demand rises, the price of the shares also increases. The same holds true for a stock whose prices plummet. If there are too many sellers looking to sell off their stocks, the company would be perceived in a bad light. As the supply of shares increase and the demand is lower than the supply, the price of the stock would fall. You can also track established indexes like the Nifty 50 to select which companies to invest in. Nifty 50 is a benchmark index that monitors the movement of the share prices of selected bluechip companies. 50 selected companies are tracked by the index covering 13 sectors of the industry. The index, therefore, covers about 65% of the float-adjusted market capitalization of leading companies.Also, when investing, you should understand the types of stocks trading on the stock exchange. There are, broadly, three types of stocks which include the following – Large-cap stocks are stocks belonging to companies that have a large market capitalization. These are those companies which are established from a long time and enjoy a very good reputation. Mid-cap stocks are stocks that belong to companies which have a medium market capitalization. These companies lie between the spectrum of large-cap and small-cap companies having a market capitalization ranging between INR 5000 crores to INR 20,000 crores. Small-cap stocks are stocks belonging to companies that are relatively new in the market and have a low market capitalization. The art of investing in the share marketUnderstanding what is share market and how it works is not enough. You should also understand how to invest. Always understand your risk appetite before investing in a stock market. Though the market promises good returns, there is an equally high chance of a loss when the market falls. You should, therefore, invest only up to the limit which suits your risk profile.Always study the market and the participating stocks before selecting a particular stock for yourself. Do a trend analysis of the price movement of the selected stock and go through market predictions. Don't get too emotional in case of falling markets because, given time, the market can correct itself.Be patient with your investments and invest only what you can afford. Don’t get greedy about the returns. Start small and then build up your investment as you learn the ropes of share market investing. Take the help of a good broker who has the required expertise in the field to guide you to invest wisely. IndiaNivesh is an online platform wherein you can get expert guidance on how share market works in India. You can trust IndiaNivesh’s experts to give you investment advice suitable to your risk profile. Your money is hard-earned and at IndiaNivesh you can make your money work harder to give you a good corpus.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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