What are the Net Assets?

what are the net assets

What are the net assets? The word asset of course often heard especially in accounting discussions. Which shows assets or assets owned by individuals and companies. The net asset value is basically the sum of all assets. That reduced obligations that must be paid such as debt or expense.

In the case of financial practice, net assets often used as the base value for the type of mutual fund investment.

In this article, we will review more deeply the value of net assets and how they are applied in financial studies.

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Mutual Fund Investment

Before entering into a discussion of net assets. We need to first understand mutual fund investments in which there are concepts inside. Investment indeed as proof as a way to increase income more effectively. At least compared to just saving money in the bank. One type of investment that is easy to do and has a relatively small risk is mutual fund investment.

In simple terms, mutual funds are you giving money to Investment Managers to be managed in the capital market on various investment instruments. Investment in mutual funds may still be relatively new and there are still not many familiar with it.

Because this investment grows along with the development of the capital market and the stock exchange. But compared to other capital market investments, mutual funds have the lowest risk and are certainly safer.

You can start investing in mutual funds by spending only a small capital of $ 10. But like other investments, the lower the risk you take, the lower the profit that may be obtained. Small money invested, hence will get small profit obtained. And vice versa, greater money that invested hence will obtain higher profit too.

Make sure you have consulted with a credible investment manager or trusted financial expert before investing to avoid the risk of loss.

Net Asset Value

In the practice of mutual fund investment, there are sentences that we often heard namely Net Asset Value (NAV).

NAV is the total funds in mutual funds based on the value of assets owned such as stocks, bonds, etc. after deducting operational costs.

NAV shows the total funds owned by investment fund management companies or companies where investment managers manage incoming investment funds.

The calculation of NAV for mutual fund companies is based on Fair Market Value (FMV) which shows the price of the current transaction. Where the value can change every day.

As with currency rates, the changing value of FMV then affects the NAV of a mutual fund, which means it will continue to change as well. But you can access information about this NAB through various means such as newspapers or websites that always provide updates every Monday to Friday.

Usage of Net Asset Value

Net Asset Value (NAV) is used as the basis for determining the price of an investment unit in mutual funds, known as NAV/Unit of Participation (UP), or often also called NAV/Unit.

NAV/Unit calculating of total assets in a mutual fund company that has been reduced by operating costs, then dividing the number Unit of participation. (shares or other investment instruments) owned.

So when you want to know the price of an investment unit in a mutual fund company. You can just look at the NAV / UP data from that company.

Just like the NAV value, the NAV/UP value also changes every day. Because of course, it is also based on the Fair Market Value (FMV) calculation that is currently in effect.

In addition, the value of NAV / UP will possible to change, because of the changes factor funds managed by the Investment Manager.  Asset Under Management (AUM) increasing the value.

But just like NAV information, you can easily get information about NAV/UP from various means. NAV/UP itself is referred by many people with NAVs. Although it has different meanings, it is understood by the majority of investment actors.

NAV/UP is actually not providing information about the profit that you can get directly from mutual fund investments. But it helps in the process of implementing the investment itself. By knowing the NAV/UP, you can estimate how many investment units you can buy with the funds you have.

This will helps how the investment plan is right for you to do, and estimates of the profit that might be obtained indirectly.

Net assets example

The NAV/UP of a trusted mutual fund company that you will enter an investment of $ 1,108.91 per unit. You can invest directly in a number of funds or choose to buy per unit. Let say If you want to directly invest $ 1,000,000 in funds, you can get around 901,7864 units. Or you want to buy 1,000 units directly, so you need to invest $ 1,108,910.

To see the calculation of the possible benefits to be obtained, you can see the NAV / UP value information that is being applied then compared to what the value is when you buy. Comparisons of differences in values that occur that can then be a measure of the estimated benefits that you might get. However, it is best to invest in mutual funds or other investments in general, you do not directly sell it and leave it for about five years so that the benefits are more significant.

Is net assets the same as equity?

The answer to this question is sometimes the same meaning and sometimes not. Generally, the term “equity” is for organizations that have owners. Every organization that has an owner, using the terms equity, shareholders, or fair justice is appropriate when we talk about corporations or organizations.

Using the term equity also applies equally to individual ownership and partnership. What’s interesting when talking about the organization, using the term “net assets”, it will also be appropriate. In this matter, net assets and equity have the same meaning.

But the meaning of the two becomes different if the organization does not have an owner. For example, some nonprofits do not have owners. In this case, using the term equity is not appropriate because the definition of equity is the owner’s claim within the company.

Net assets nonprofit will be a far more appropriate term. In short, if the organization has an owner, “equity” and “net assets” can be used with the same meaning. But if the organization does not have an owner, then the term equity is inappropriate and the term net assets should be used instead.

Net assets value formula

Net asset value is to take data from assets stored in a portfolio. This data includes cash, minus all liabilities, divided by the total number of shares outstanding. Below is the Net assets value formula;

NAV = (Market Value of all assets + Cash-Liability) / Total Outstanding Shares

  • The market value of an asset is the price currently prevailing in the market. But assets can lose value over time, so this price is not the same as the asset purchase price.
  • Cash in this formula refers to all cash. Or cash equivalents, which are assets that can be easily converted into cash. Types of cash equivalents include securities and securities (government bonds, ordinary shares, and certificates of deposit).
  • Fund liabilities refer to all money owed to the bank. This includes investment management fees, service providers, and other liabilities that may be owned by mutual funds.
  • Outstanding shares are all mutual fund shares that have been authorized, issued, and bought by investors.

Net assets vs net worth

Net assets are the same as company assets minus liabilities. Assets refer to valuables owned by the company. While liabilities are corporate obligations that must be fulfilled to others.

Net worth for individuals is same concept here. Net assets are almost the same as shareholders’ equity because they are the monetary value of a company.

Negative net assets

Sometimes the organization experiences unprofitable conditions, which triggers negative net assets. If at the end of the financial year the company’s net assets are negative, the company needs to take several important steps.

  • Increase the value of net assets to the amount of share capital.
  • Reduce its share capital.

To increase the net assets of an organization or corporation can do two ways.

  • Revaluation of assets (fixed assets and intangible assets)

This method is to make monetary contributions to the current account by the owner and shareholder of the company. Revaluation of assets can be done by reassessing assets by involving independent appraisers.

If after valuation, the value of net assets increases, capital can be added. If the company has valued its assets, the company will be asked to do this regularly in the future so that the value does not differ significantly from its current assets.

But if it turns out the company failed to do it, then it will be subject to sanctions. In this case, the company chooses itself how often it will reassess its assets.

  • Fund contribution.

How to increase net assets, the other way is shareholders contribute funds, these contributions are recorded in accounting as other income and increase the value of net assets.

The final word

This is the discussion about Net Asset Value (NAV) and its use in mutual fund investments in the capital market.

Gathering and knowing as much information as possible is very important before you make an investment.

Hopefully, so that the investments made can be right and certainly make a profit. Do not hesitate too to consult with a financial expert who is an expert so that you do not misstep in investing. Hopefully, this information is always useful and successful!

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1 Response

  1. November 19, 2018

    […] What are net assets?This is following explanation and use […]

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