In the financial world of investments, a NAV is a commonly used term. For the new investors into the markets, however, it is sometimes not easy to understand if what is a NAV and how it works.
NAV stands for Net Asset Value. You might have heard or read yourself on any business newspaper or magazine that NAVs of a Mutual Fund are rising or falling while talking of stock markets.
NAVs represent the performance of Mutual Funds. This is just like stocks. As every stock in a market has its price, mutual fund schemes too have their NAVs.
The NAVs also come into play while investing in an insurance product called as Unit Linked Insurance Plan or ULIPs. To have a detailed look on NAVs, we need to understand some basics about mutual funds.
There are various Asset management Companies (AMCs) and they ask the investors to invest with them. The money collected from the different investors is pooled at one place.
These AMCs hire the professionals who have expertise in financials and markets called as Fund Managers. A scheme under mutual fund is launched and the fund managers buy number of stocks of different companies, bonds or other money market instruments out of the pooled money.
Hence a well diversified portfolio (visit the link for detailed understanding of portfolio) is created which involves stocks from the different sectors of the economy in different proportions.
These portfolios are managed by these fund managers and are reviewed from time to time. These are usually long term investments although the shuffling in portfolios goes on.
Each scheme of the mutual fund is listed on the stock exchange. The market determines the NAV of these schemes according to the stocks and bond prices whatever is held under the scheme portfolio once the scheme is listed at the exchange. (Read more on how to calculate NAV)
The NAV represents the price of one Unit of the fund. The difference the NAV has from the stocks is that while the prices of the stocks keep changing every second during the trading hours, the NAVs change only once daily.
NAVs are calculated according to the closing prices of the portfolio constituents at the end of the trading. The usual cut off time to determine NAV is 3:30 PM. Thus mutual fund schemes protect the investments from undue volatility of markets unlike stocks.
Each AMC can launch any number of different schemes under its name and each scheme has different underlying portfolio structure. These can be equity schemes which have entire exposure to equities or balanced and liquid schemes which have bonds or debentures which are safer.
Each scheme has different NAV according to its portfolio which keeps changing according to the stocks and markets performance. In case of market up move, NAVs tend to rise while they fall when markets correct. The NAVs of the Equity Schemes change much rapidly than the Liquid Schemes or Ultra Short Term Schemes.
While investing in mutual fund, you simply by a scheme and the Units are allotted to you according to the NAV. Suppose you invest ₹100000 in a mutual fund scheme with NAV of ₹ 25, you will get 4000 units. If the NAV moves to ₹ 30 in near future, you will be making a profit of 4000 x 5 = 20000 on your investment.
Similar is the scheme of things for ULIPs. They are similar to mutual funds investments except that you get additional provision of insurance with the ULIPs.
It is also noteworthy that you should not mix investment with insurance. You can opt for pure insurance plan for insurance purposes. That is why ULIPs could not become much popular among people.