Q1. What do you mean by Net Asset Value (NA V)?

Discuss how to
calculate NAV of a fund
Answer:
Net asset value (NAV) represents a fund's per share market value. This is the price
at which investors buy ("bid price") fund shares from a fund company and sell them
("redemption price") to a fund company. It is derived by dividing the total value of
all the cash and securities in a fund's portfolio, less any liabilities, by the number of
shares outstanding. An NAV computation is undertaken once at the end of each
trading day based on the closing market prices of the portfolio's securities.
How to Calculate Net Asset Value for a Hedge Fund
Choosing the right hedge fund to invest in can be a daunting challenge, but savvy
investors use a variety of tools to compare the relative strength of different funds.
Net asset value is one such tool that provides insight into the true value of different
funds at different times. To calculate net asset value on a hedge fund, you must first
choose a calculation method, and then determine the fund's total assets and
liabilities.

Choose a Calculation Method

The question of when to calculate asset values in a hedge fund can cause
some confusion, but determines the method used. If a fund trades assets on
multiple exchanges around the world, one exchange may be closed while two
or three others are open. Because of this, asset values in some parts of the
fund's portfolio will always be in flux. Some investors use the final asset
values at the end of each region's respective trading day for the calculation,
while others use the values from all holdings at a chosen moment in time.
Calculate Asset Values
Hedge funds hold a variety of assets in various states of liquidity, including
stocks, currencies, options contracts and bonds. Hedge funds seeking new
investors should provide in-depth information on their current holdings. When
you are ready to calculate the asset values, according to your chosen
method, multiply the quantity of each individual holding by its market value
at that time to determine each holding's current value. Add all of the results
together to determine the total asset value.
Calculate Liabilities
Hedge funds incur the same types of liabilities as other businesses, including
debt payments, interest accumulation, salaries expenses and overhead. Add
all of these expenses together to calculate the fund's total liabilities, keeping
your chosen time frame in mind. Since net asset value provides a snapshot of
value at a moment in time, only calculate current liabilities, including current
payments of long-term debt.
Calculate Net Asset Value
The Securities and Exchange Commission defines net asset value for an
investment business as the difference between the company's total assets
and liabilities. Use the following formula as a reference for your calculations:
Net Asset Value = Total Assets - Total Liabilities
The larger the net asset value as a percentage of total assets, the more
efficient the fund is at maximizing profit while keeping costs low. A higher
total also indicates that a fund has more capital to invest, allowing it to earn
larger returns.

For example, if a fund has assets of $50 million and liabilities of $10 million, it would
have a NAV of $40 million.
This number is important to investors, because it is from NAV that the price per unit
of a fund is calculated. By dividing the NAV of a fund by the number of outstanding
units, you are left with the price per unit. In our example, if the fund had 4 million
shares outstanding, the price-per-share value would be $40 million divided by 4
million, which equals $10.
This pricing system for the trading of shares in a mutual fund differs significantly
from that of common stock issued by a company listed on a stock exchange. In this
instance, a company issues a finite number of shares through an initial public
offering (IPO), and possibly subsequent additional offerings, which then trade in
the secondary market. In this market, stock prices are set by market forces of
supply and demand. The pricing system for stocks is based solely on market
sentiment.
Because mutual funds distribute virtually all their income and realized capital
gains to fund shareholders, a mutual fund's NAV is relatively unimportant in gauging
a fund's performance, which is best judged by its total return.
Most commonly used in reference to mutual or closed-end funds, net asset value
(NAV) measures the value of a fund's assets, minus its liabilities. NAV is typically
calculated on a per-share basis.
How it works/Example:
A fund's NAV fluctuates along with the value of its underlying investments. The
formula for NAV is:
NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings Fund Liabilities) / Total Fund Shares Outstanding
Let's assume at the close of trading yesterday that a particular mutual fund held
$10,500,000 worth of securities, Rs.2,000,000 of cash, and Rs.500,000 of liabilities.
If the fund had 1,000,000 shares outstanding, then yesterday's NAV would be:
NAV = (Rs.10,500,000 + Rs.2,000,000 Rs.500,000) / 1,000,000 = Rs 12.00
A fund's NAV will change daily as the value of a fund's securities, cash held,
liabilities, and the number of shares outstanding fluctuates.