Now, how is the net asset value calculated? The plan’s net asset value is the total value of its investments less liabilities. This means that you can calculate the net asset value of the plan by finding out the total value of its assets (investments, cash, etc.) and deducting the total value of its debts, fees, etc. You must divide this value by the number of units in the plan since the net asset value is expressed as the value of the plan per unit.
The net asset value of the plan increases when the stocks or securities held by the plan perform well. This means that when the prices of investments increase, the net asset value of a plan also increases. And the reverse is also true.
Now, should you base your investment decisions on the net asset value of a mutual fund. For example, many mutual fund investors thought they should buy mutual funds during an NFO (new fund offering) because the units are available at Rs 10. Likewise, some people still believe that they should always buy programs with a lower net asset value because there is the possibility for NAV to go further.
These are wrong approaches. Perhaps because these investors are actually comparing mutual fund shares with publicly traded stocks. However, you shouldn’t compare stocks with mutual funds because they are two different instruments. The price of a share is the value of a share of a company. Most of the time, the price also reflects the company’s market expectations in the days or years to come. However, the net asset value of the plan reflects the value of its assets less its debts.
This means that the net asset value could be higher if the investments made by the plan have gone well. For example, a seasoned program that has been around for many years would have a higher net asset value because it made investments that have worked well over a period of time. However, a new scheme would have a NAV of Rs 10 as it only collects money from investors. Its net asset value would only increase when the system begins to invest and the value of those investments appreciates.