In this article, I want to take on a term that’s really important for fund investors. To understand but it’s also important for anyone who buys shares net asset value or NAV.

So what is NAV? It appears all over fund reports research reports, and so on. Short for net asset value so not surprisingly three-letter acronym NAV vital for all kinds of investors. And represents the sum of a fund or a firm’s assets liabilities.

NAV stands for Net Asset Value. For example, when you buy shares, you buy them at a share price.

Similarly, when you buy mutual funds, you buy actually units and you buy them at NAV. NAV is effectively a sort of average of all the shares. That is held in that mutual fund.

It changes daily because the share price changes daily. When you invest money in a mutual fund you are actually buying units of the mutual fund. When you redeem you are effectively selling the units of this mutual fund. And it all happens at the NAV of that day.

For example, let’s take Motilal Oswal Multicap 35 fund. Its NAV on 13th November was Rs 25.60. That means if you invest Rs 10,000 in it, you will get 390 units. And if you are going to redeem Rs 10,000 out of it you are effectively selling 390 units.

So, The idea that is here is basically in mutual funds you buy and sell units. And the price of these units is called NAV.

Watch video: what is NAV

Another tool to measure the value of the company is to look at the net asset value of a share. The net asset value is pretty much as you’d expect, you take the assets of a company and deduct the liabilities. This includes any bank loan debt effectively. 

It’s the closing down the value of the company you divide that figure by the number of shares. In the issue and you have the net asset value of the share.

Typically shares don’t just trade on their NAV. Trending tends to be driven by supply and demand and market sentiment not just NAV.

However, NAV can give you an anchoring point to see. Whether the market is very pessimistic about the company or is very extended in terms of valuation. Some shares may be out of favor. They may be in an unfavorable sector and may well be below the NAV.
Similarly, some stocks may be very hot. There may be a lack of supply and a lot of demand. So their stock may well be above the nerve it’s worth bearing in mind that some companies. Don’t lend themselves to net asset value valuation.

For example, people businesses where the value of the people. Doesn’t appear on the balance sheet. So in creative industries like media or advertising where the value of the company is in its human capital. NAV can be less valuable as a valuation to learn.

What is NAV a Brief explanation

So balance sheet basis what is NAV? In a nutshell, it is the difference between a firm’s assets and liabilities. This is not the balance sheet basics article. But as a snapshot what that means is that essentially the bigger affirms assets. The bigger its overall NAV the bigger affirms liabilities assets. By the way, are the investments that it owns if you’re looking at the fund. It’s the portfolio of the investment fund manager or director. That is bought on your behalf at their latest market value. The bigger those are the bigger NAV the bigger liabilities are the smaller your NAV now.

Lliabilities in a fund that’s allowed to do it means debt or borrowing. So a very simple example if funds got assets of saying a hundred million all right no liabilities. Its NAV is 100 million very very simple terms if assets double to 200 million.

That will double the NAV all other things being equal to 200 million. All right borrowings have the reverse effect on NAV. So if a fund got assets of 100 and let’s say borrowing of 20. Then the NAV is the difference between the two which is 80 and just worth noting. The point I cover elsewhere, but just worth noting was the fund to double its assets. As I suggested just now to 200. Still carrying death 2200 -20 is 180.

Which is more than doubling nav. So funds and firms that can borrow gearing as it’s called have the effect of boosting. The overall increases in assets the reverse is true. All right funds that take on borrowing suffer in bad times. So as an investor is on the lookout for two things. That is happening to assets under management. Hopefully, they’re rising over time what’s happening to the firm’s overall debt or gearing level. Both key influences on the NAV number.

What is Reveals

now also tell you it’s a sign of a firm or a funds point of view and investment firms’ overall health rising NAV basically is a good thing. It means that the firm is getting its investment strategy right. Over time reflects asset growth less debt and if you’re looking at an open-ended style of the fund. It actually forms the basis for telling you what you’re holding in the fund is worth.

In other words, the firm’s investment market value is directly driving what your investment in that fund is worth. Anyone point in time at the latest valuation points it’s called just to illustrate. That imagine you’ve got a fund that sat down and landed its portfolio at 100 million. The number of units is sold to people like you investors is a hundred million. Very simple math the next valuation point we do valuation divided by the number of units and that gives us a pound can you get in and out of the fund a pound probably not. All right because there may be a bid to off a spread now some open-ended funds don’t operate a bit to offer spread others do there is a bid to office spread just bear in mind.

If you’re looking to buy you’ll probably pay a little bit more than the pound. All right, you’ll pay the firm’s offer price as it’s called you’re looking to sell. You probably get a little bit less than a pound so churning units by buying and selling them quickly. Doesn’t make a lot of sense in a lot of cases. Because you’re going to suffer that spread straightaway in this example.

I’ve made it a for P for illustration spread. Now what do I mean? You know ‘pn ended funds your unit values are being driven directly and that’s where NAV is very important because changes will be directly mirrored in what you’re holding is worth.

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There’s no premium or discount with an open-ended vehicle. Now what does I mean by that is there is another sort of vehicle an investment trust company. Where yes there’s a NAV but it’s not directly driving the value of your holding in the vehicle with closed vehicles. The value of the shares that you hold is driven by the market.

Buyers and sellers, all right they’re usually listed in an exchange. You can be public trade in a normal way and that means that the market determines what the fund is worth. Not directly the underlying NAV and that’s quite an important distinction. Now come back to that in just a moment.

Open-ended funds

Now for open-ended funds be careful all right be careful once you’ve got your head around that basic distinction the way that works. Some people say well. okay, If I’ve got two similar funds I’ll go for the cheaper one and cheaper I’m going to define it as a smaller NAV because that’s going to presumably make the fund a little bit cheaper than one with the larger NAV isn’t it all right usually low NAVi’s reflect poor performance and even where they don’t be a bit careful because very small funds charges can eat a sort of disproportionate proportion of the overall value of the funds so just be a little bit careful all right it’s not always a good idea to think small in the funds world is what you’re looking to invest in the closed-ended funds all right the mechanism for determining

overall view the market takes the fund is slightly different you get this idea of a discount or a premium to NAV what does that actually mean in practice.

Close-ended fund

well here’s a closed-ended fund but I’ve made up then we’ll look at a real one in the made-up one we’ve just got three years of performance. There’s the NAV. Which is the assets held by the fund manager.

Increasing gently over time but there is the market capitalization. The prices per share of the funders determined by buyers and sellers and you can see that here the two moves apart and here the two moves apart and that’s because at the end of the day. The price of the fund isn’t being pegged to NAV as it would be with an opened fund so here you’ve got a premium opening up, and here you’ve got a discount opening up and that’s interesting for two reasons it shows you quite clearly that NAV isn’t directly driving completely the value of the fund as far as investors are concerned, and secondly, if you’re one of those investors that looks at a discount and things well maybe one day that will close back up or even become a premium

you can look sometimes at two funds following essentially the same strategy. One open-ended one closed-ended and if the closed end of the vehicle is trading a discount when they remember the NAV S will be similar to the following the same strategy then some people would say

There’s an opportunity an arbitrage opportunity by fund trading a discount and wait for that discount to close up because if there’s a very similar fund so open-ended. Well, there won’t be a discount there but have a similar NAV sum of a strategy some of our management styles. Why as the close-ended vehicle got a discount at all right food with all their cover that in more detail in another article

Witan Investment Trust

Now in real life that happens to so I made up the previous. For example, here’s a real one there is the NAV for the with hand investment trust over a longer period and there is the market capitalization. And you can see there’s a gap there’s a discount established they’re running it about well looking at the real numbers 10 to 11%.

It does close up you can see it just happening at the end of the slide as investors got confidence in a new management team. That narrowed the discount so anyone who got in before that discount narrowed will have had a kicker on their returns. That isn’t available when open-ended funds. Why not because, an open-ended fund the NAV. The value of the fund is directly linked through the valuation process. One another way of looking at discounts and premiums net asset value just going to mention it here if you’re the kind of person who looks at a company’s NAV is also important but the jargon changes when you’re looking at companies people tend to talk about the price to book the market capitalization of the company compared to the book

value of its asset there’s a very similar principle at work. Here so you get the price to book ratio. X, as they’re called below one. And that’s the equivalent of saying a discount. Maybe for some investors, that’s a sign of a bargain great I can buy this thing for less than in theory it’s actually

worth a PB above 1 comparing the two numbers. All right so you’ve got say a market capitalization of 200 million. And a book value of assets they’re only a hundred million. So literally, a price is above the book a premium to an AV less of a bargain. Maybe the funds get a little bit expensive.


Now that’s fairly fast so for other information or some of the stuff I’ve just talked about I’m taking some knowledge for granted in this article what we’re open and closed then did funds that will give you a bit more background on the two styles I talked about ETFs and hedge funds once you’ve done that first article quite useful add-ons there and for more on balance sheets because I gave you literally a minuscule snapshot for the purpose of this article balance sheet basics quite a nice one.

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