Sunday, September 24, 2006

Concepts Clarified !!!!

Some Concepts Clarified
There are certain concepts that I would like to clarify before we touch upon the much awaited subject of Mutual Fund investing.
NAV is a term that you will often hear in the context of Mutual Fund investment.


Net Asset Value is the market value of the assets of the scheme and cash on hand minus its liabilities and management fees.


The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. So, Net Asset Value is the market value of a unit of a scheme after accounting for all expenses on any given business day. The market value of the investments is determined on the basis of their closing prices on the principal stock exchange.

For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so only process orders after the NAV is determined.


Closed-end funds may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

The NAV is what one share or unit is worth right now. You don't invest in a mutual fund by buying a fixed number of units but rather by a lump rupee sum such as Rs.1,000. Since it would be a fluke for the unit price to be an exact, even multiple of your investment, you will be issued some partial units to make up enough to cover your investment to the paise.


In the next blog, I shall explode a myth commonly associated with NAV.

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