Net asset value that is the NAV is nothing but the value of a particular organizations asset less the value of the liabilities. This term is mostly associated with the open ended fund or the mutual funds. That is because when the investor would like to redeem the mutual fund the value that he would be getting is the net asset value as on the date of redemption. It also means the equity value or the book value of the particular company. Net asset value is nothing but the total equity value. It can be divided by the total outstanding shares to derive at the NAV per share. That is the net asset value for each share can be ascertained.
Fund accounting which also known as investment accounting or portfolio accounting or the securities is accounting is the reason why all this net asset value and the records relating to that came up. The fund accounting system is very refined. It is all computerized. Here the systems will maintain the account for each investor that is what the investor has purchased or sold, what is the gain or loss that they have generated from the investment and any kind of operating expense that is related to their investment.
The fund’s assets and other investments are valued on a regular basis. The valuation might be done daily or monthly or weekly. It depends on the type of the und and the type of the regulations which is associated with that fund.
There is no single method that is followed throughout to calculate value of the assets and the value of the liabilities. For this purpose it has been agreed that the valuation will depend on the valuation principles which is applicable at that time and also it is based on the circumstance.
Once all the accounting entries are posted and the books of accounts are closed then it becomes very easy to calculate the net asset value and also the value per share.
It is mostly for the open ended funds the term the net asset value is used. The interest and the share in that fund will not be traded between the investors. The fund will be issued by the company to the investor similarly the investor cannot trade it with anyone else. They can sell it only when they or the company decides to redeem the fund. Hence there will be dealings only between the company and the investor. There will be no investor to investor dealings. The fund house will issue or will redeem the fund or give interest on that based on the net asset value of the fund so that it looks fair both from the angle of the investor as well as for the fund. When the investor redeem the fund they will get the net asset value of the fund that they have received in the form of cash which means that the liquidity is high.
Let us elaborate this with the help of an example. Say for instance a company has a net asset value of 2000 and the total number of shares is 10. Then the value per share is 200. Hence when a person invests 400 it means that he has got 2 shares of the company. After the investor invests the total net asset value of the company will increase. So he will be given a proportionate share in case he decides to redeem the investment. However when the redemption is done any kind of income or loss that is incurred on the fund during the holding period will be adjusted.
So in the case of the open ended funds the investors should always be aware of the value of the assets as well as the value of the liabilities of the fund. A total contrast to this is the close ended funds. These are funds that are traded in the open market. The trading is between the investor and the investor. The price of the share will be the price that the investors agree and it might just not be in relation to the net asset value of the share. Normally these close ended funds that are traded in the republic are traded lesser than the net asset value.