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Check out factors that shape fund NAV

Investors have to be careful when studying the net asset values of their mutual fund holdings because the method of valuation plays an important role in the process. Arnav Pandya tells more.

business Updated: Aug 15, 2008 21:12 IST

Investors have to be careful when studying the net asset values (NAV) of their mutual fund holdings because the method of valuation plays an important role in the process. There can be times when the NAV depends upon some factors that might change quickly or that is influenced by some late changes taking place in the market. They have to ensure that such happenings don’t catch them on the wrong foot.

Small turnover
When it comes to equity, there are several shares that do not have a high amount of liquidity in the market. This means that the turnover in such companies is less because of the floating stock present in the market. This results in a situation where some stray deals at specific prices determine the final price at the close of the day. Such a situation affects the extent of the impact on the NAV of the funds that hold these stocks.

This often becomes a factor that influences the overall valuation for the scheme and hence a careful look at all the shares that fall into this category is a must. Doing this will ensure that the proper picture is presented to the investor even if that means taking a bit of a hit in terms of the mutual fund investment.

Investments not traded
There are several investments that are not traded in the market. This will include both debt as well as equity instruments. Since there is no public price for these investments, there has to be a fair valuation undertaken.
This can vary depending on the conditions and assumptions that are considered in the process and there can be sudden variations when the position is revised. This poses a risk and hence an investor should make provisions when high proportion of such instruments is present in the portfolio of the scheme.

Specific impact
There might be some cases where the developments in a particular company can impact the pricing and the valuation for the investment.

One has to be careful of such situations because sudden changes in some investments can have a direct impact on the way in which the NAV is valued. This can be a temporary situation but investors need to keep a lookout to ensure that such short-term measures do not impact them when the price of their scheme suddenly shows sharp movements.