HOW TO CALCULATE FACE VALUE AND MARKET VALUE IN MUTUAL FUND

ARTICLE BY,

RANGANATHAN.M

HOW TO CALCULATE FACE VALUE AND MARKET VALUE IN MUTUAL FUND

Face Value in Shares

Let me explain it with an example. Suppose You want to start a Company with the Capital of Rs. 1,00,000/=. Now, suppose you do not have Rs. 1,00,000/=. You can arrange the money from your friends and relatives. For this, you will have to issue shares, it can be 100 shares, each of the Face Value of Rs. 1,000/=; or 1,000 shares of Rs. 100/= each or 10,000 shares of Rs. 10/= each or 1,00,000 shares of Re. 1/= each. Shares can also be issued for a FV of Rs. 5/= and Rs. 2/=. I think, now you have a fair idea about the Face Value of a share.

Book Value in Shares

Before going to answer your 2nd Q why the market value is so high, I will explain what is Book Value. Suppose your company grows 10 times in a given period of time, and it is worth Rs. 10,00,000/= now. The price of the share of your Company will also grow 10 times, i.e. the book value of a share of the face value of Rs. 10/= will become Rs. 100/=. Now imagine your Co. makes some losses and is worth only Rs. 10,000/=, the book value of the share of Rs. 10/= will become Re.1/= only. The Shares are first valued on their Book Value and then by the future prospects or risks involved. If the future prospects are good, I will buy a share (issued by you for Rs. 10/= FV, now at Rs. 100/= BV) for Rs. 120/= or Rs 280/=. This will depend on the Market, at what price the holder of the share in your company, is willing to sell. And, suppose, your Co. is making losses, I will not buy the share of FV Rs. 10/=, now available at Re. 1/=, even if the holder agrees to sell at Re. 0.40p.. And that is the reason why the shares of different companioes are selling at different prices

Performance Evaluation of Mutual Funds:

Any meaningful evaluation of performance will necessarily have to measure total return per unit of risk or the ability to earn superior returns for a given risk class. There are various statistical techniques to measure this factor. One of the technique estimates the realized portfolio returns in excess of the risk free return, as a multiple of the factor of the portfolio. The factor of portfolio, in turn, measures the systematic or undiversifiable risk of the portfolio, the relation to the market index.

Mutual funds sell their shares to public and redeem them to current net asset value (NAV) which is calculated as under-

Total market value of all MF holdings - All MF liabilities
NAV of MF = -------------------------------------------------------------
No. of MF units or shares

OR

Market value of Scheme's Investments + Receivables + Accrued
Income + Other Assets - Accrued Expenses - Payables - Other Liabilities
NAV of MF = -------------------------------------------------------------------------------
No. of Units outstanding under the Scheme

The net asset Value of a mutual fund scheme is basically the per unit market value of all the assets of the scheme. To illustrate this better, a simple example will help.

Scheme name XYZ
Scheme size Rs. 50,00,00,000 (Rs. Fifty crores)
Face value of units Rs. 10
No. Of Units (Scheme size) 5,00,00,000
Face value of units
Investments In shares
Market value of shares Rs. 75,00,00,000 (Rs Seventy Five crores)

NAV(Market value of
Investments / No. of units) = Rs. 75,00,00,000
-----------------------
5,00,00,000
= Rs.15

Thus, each unit of Rs. 10 is worth Rs. 15.

Simply stated, NAV is the value of the assets of the assets of each unit of the scheme, or even simpler value of one unit of the scheme. Thus, if the NAV is more than the face value (Rs. 10), it means the money has appreciated and vice versa.

NAV also includes dividends, interest accruals and reduction of liabilities and expenses, besides market value of investments.

Let's talk about dividends

In the dividend payout option, you are paid the dividend, and the NAV falls.

In the dividend re-investment option, the dividend is not paid to you. Instead, additional units are purchased at the revised NAV.

The bonus option is similar to dividend re-investment, except that the fund announces the bonus ratio instead of dividend.

Hang on! Don't give up.

Let's say you own 100 units of a fund whose current NAV is 20.

So your investment value is Rs 2,000 (100 x 20).

Now, the scheme declares a dividend of 10%. Do note, dividend is always a percentage of face value. Face value is the price of unit of a fund and is Rs 10. So 10% of face value would be Re 1 per unit.

For the bonus plan, the scheme declares a bonus of 1:10. This means an additional unit for every 10 units held.

This is what will happen under the various schemes.

Before declaration of dividend / bonus
	Growth	Dividend payout	Dividend reinvestment	Bonus
NAV	20	20	20	20
Units	100	100	100	100
Value (Rs)	2,000	Rs 2,000	Rs 2,000	Rs 2,000
After declaration of dividend / bonus
NAV	20	19	19	18.1818
Units	100	100	105.2631	110
Value (Rs)	2000	1900	2000	2000
Dividend received in cash	-	Rs 100	-	-
Additional units	-	-	5.2631	10

Growth option: No change. Over time, the NAV will grow in value. Whenever you redeem (sell) the units, you get your entire earnings by way of capital appreciation.

Dividend payout: The unit holder will get Rs 100 as dividend while the NAV falls to Rs 19.

Dividend re-investment: The dividend of Rs 100 is not paid in cash but is used to purchase 5.2631 more units.

Bonus option: You get 10 more units, because of which the NAV falls to Rs 18.1818.

I think now you can understand