NAV Demystified

Visit our website: http://franklintempeltonindia.com NAV Demystified What is NAV? Ughh, this is one term that has scared and confused people more than anything else when it comes to mutual funds! It’s a value, that’s pretty obvious, but value of what? What does it include? What does it show? It always seems confusing… Time for a short story… Say you have this 1000 sq. ft house that you want to sell. So you find this real estate expert who has got a buyer for the house at Rs. 35 lakhs. But this includes a commission of Rs. 50,000 for helping you sell the house, which means the true value per sq ft that you got for the house is Rs.3,450 . How’s that? Well, you take the selling price of the house , deducted any expenses from it and then divide it by the size of the house. (Ta-da) The price that you arrive at is the true value per sq ft! Just like that, the NAV per unit of a mutual fund scheme is the sum total of the market value of all the assets held in the portfolio including cash, less expenses, divided by the total number of units held by all the investors. So say the market value of all the assets of the scheme, after deducting expenses, is Rs. 100 lakhs and the scheme has issued 5 lakh units to investors, then the NAV per unit of the fund is Rs. 20. The market value of these assets may change every day, which is reflected by the fluctuations in the NAV per unit. And the Asset Management Company will be required to disclose this NAV on a regular basis. . Now why is this number important? Well, for three reasons… When an investor invests in a scheme, it helps to calculate how many units he can buy. So if the NAV of the scheme is Rs. 25 and the amount being invested is Rs. 25,000, the investor will receive 1000 units. Correspondingly when you redeem your investments, meaning when you take your money out of the scheme, if the applicable NAV per unit of the scheme at that time is Rs. 50, you will receive Rs. 50,000 for your 1000 units. The third reason the NAV is important, is to gauge the performance of the scheme. This is done by comparing the NAV of the scheme over two different points to know how well or poorly the scheme has performed. For e.g. If the NAV per unit of the scheme today is Rs. 25 and 2 years ago it was Rs 15 you know that the scheme has delivered an absolute return of 66.67% over 2 years or 29.10% every year over a period of 2 years. Many of us think that if a fund with an NAV of Rs. 10 is cheaper than another Fund with an NAV of Rs. 200? Umm, not really: Say you know of two schemes, ‘A’ and ‘B’ with the NAV of Rs. 10 and Rs. 200 respectively. You invest Rs. 10,000 in each scheme at the beginning of the year, giving you 1000 units of scheme A and 50 units of scheme B. That year both schemes perform well, making the portfolio value rise by 20%. The value of the 1000 units in scheme A is now Rs. 12,000 and of the 50 units in scheme B is now also Rs. 12,000 . So you see, although the NAV of scheme A was significantly lower than that of scheme B, the value of the investment eventually grew to be the same amount. Meaning it’s not as important how high or low the NAV of the scheme is, but what the growth of that NAV is once invested in the scheme. Returns are higher if the portfolio of that scheme has performed better than the rest. It’s that simple. Does that clear things up? Basically the NAV per unit is the price that you pay for investing in the Mutual Fund scheme! Quite like the rate per square feet that you got for selling your house. So don't be hassled and confused, just break it down. We hope you enjoyed watching this video! Watch more, and we’ll help you learn about different investing concepts. You can also write to us with your feedback (editor@templeton.com)

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