Mutual funds is one of the most convenient and rewarding investments there is. A professional fund manager will handle and does the investing on your behalf and you could just forget about your investment for a long period of time. However, though mutual funds are convenient, they still require some basics in order to make some really good gains in the future.
The net asset value (NAV) is the main basis in investing in mutual funds. The net asset value is the price that an investor pays in order to acquire shares in a particular company. The math is fairly simple, divide the invested amount by the current NAV and that is your number of shares.
However, net asset value speaks more than being the price to pay in buying shares. Knowing and analyzing NAV more will give you a better edge in investing in mutual funds. Here are the different ways on how to use net asset value in investing:
1.) It reflects the performance of a particular company. No mutual fund company does exactly the same way as the other. In a competitive world, some companies will always do better than the other while obviously, some will lag. The gains (or losses) in NAVs will tell as to how the company is performing with its pool of money.
One and the most obvious way to gauge the performance of a mutual fund company is to look at the gains in a fixed period of time. Is company A doing better than company B in a year? For the last 3 years? 5 years? The figures will tell you which company is better and thus will guide you where to invest.
2.) It reflects the potential of a particular company. Mutual funds are intended for long term thus it makes perfect sense to investigate the potential of a particular mutual fund company. Aside from knowing the performance of a company, check the credibility of the company. Will it stay for the next 15 years? 20 years? Or even 30 years? Will such company fulfill your financial goals? How long has the company been in operation?
Many mutual funds are not performing well and they probably outnumber those who are doing fairly well. These companies are most likely to disappear in the years to come and you don’t want your investment to go with it.
3.) Net asset value reflects the market sentiment. In stocks, there’s this so called technical analysis which is also very applicable in the NAV charts. Keeping a history of the NAV will help a lot because through technical analysis it will help you find good entry and exit points in your investment.
Mutual funds follow the concept of cost averaging. Cost averaging is a long term concept that is being used by value investors towards stocks, assets, equities, and other financial channels that they know for certain will grow in time. To make cost averaging a lot more effective, right entry is needed. Some investors invest on a regular basis without giving any regard towards the market behavior while some study and keep themselves updated of the market and knows when to invest. The latter normally ends up with the bigger gains.
4.) Net asset value performance could be used as an economic indicator. Generally, when a country’s economy is doing well, the NAV of its mutual fund companies will also do well. The economy affects the stock market which affects other financial tools such as mutual funds, bonds, real estate, etc.
Many people get scared when the NAV goes down thinking that their investments are losing and panic predominates. Experienced investors find dips (NAV going down) as entry opportunities to buy more shares because the values are cheap thus they could buy more and the room for growth is higher. Economic indicators are most of the time misleading. Though its partially true that dips reflect the status of an economy, normally, it’s just a correction and would recover to its real value later on. What goes down always comes back up.
Summing it up, the net asset value is a very powerful tool in investing. Master it and it will give you really significant gains, neglect it and it will work against you. Investing is not speculating thus it requires knowledge, effort, and experience to be successful. If you want some really serious gains and become financially secured in the future, why won’t you learn how the NAV works? It’s after all gonna be so worth it.