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What is NAV?
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2
Why is NAV important?
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3
How to calculate NAV?
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4
What are the limitations of NAV?
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5
How to use NAV in your investment decisions?
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Here’s what else to consider
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If you invest in mutual funds, you may have heard of the term net asset value, or NAV. But what does it mean and how do you calculate it? In this article, you will learn the basics of NAV, how it is used to measure the performance and value of a mutual fund, and how to apply a simple formula to find out the NAV of any fund.
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1 What is NAV?
NAV is the total value of a mutual fund's assets minus its liabilities, divided by the number of shares outstanding. It represents the per-share price that investors would receive if they sold their shares at the end of the day. NAV is calculated daily by the fund manager, based on the closing market prices of the securities in the fund's portfolio.
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2 Why is NAV important?
NAV is important because it reflects the current market value of a mutual fund's holdings. It also allows investors to compare the performance and returns of different funds, as well as the fees and expenses that affect their net returns. NAV can also help investors decide when to buy or sell a fund, depending on whether it is trading at a premium or a discount to its NAV.
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3 How to calculate NAV?
To calculate NAV, you need to know three things: the total value of the fund's assets, the total value of the fund's liabilities, and the number of shares outstanding. You can find these information on the fund's website, prospectus, or annual report. Then, you can use this simple formula:
NAV = (Assets - Liabilities) / Shares
For example, suppose a mutual fund has $100 million in assets, $10 million in liabilities, and 5 million shares outstanding. The NAV of the fund would be:
NAV = ($100 million - $10 million) / 5 million
NAV = $18
This means that each share of the fund is worth $18 at the end of the day.
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4 What are the limitations of NAV?
While NAV is a useful indicator of a mutual fund's value and performance, it is not the only factor that investors should consider. NAV does not account for the future growth potential, risk, or quality of the fund's portfolio. NAV also does not reflect the market demand and supply for the fund's shares, which may cause them to trade at a higher or lower price than their NAV. Therefore, investors should also look at other metrics, such as total return, expense ratio, and alpha, to evaluate a mutual fund.
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5 How to use NAV in your investment decisions?
NAV can help you make informed investment decisions by providing you with a snapshot of a mutual fund's value and performance. You can use NAV to track how well a fund is managing its assets and liabilities, and how it is affected by market fluctuations. You can also use NAV to compare different funds and choose the ones that suit your goals and risk tolerance. However, you should not rely on NAV alone, as it may not reflect the true worth or potential of a fund. You should also consider other factors, such as your time horizon, diversification, and fees, before investing in a mutual fund.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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