FAIR VALUE, FACE VALUE, NOMINAL VALUE, MARKET VALUE, REAL VALUE, BOOK VALUE

Confused with several terms

These are some terms often used in Accounting and Finance. Many really understand the difference or simply get confused between the jargons. So, this is a little article trying to uncomplicated and give you a better understanding of the terms.

Face Value/ Nominal Value/ Par Value

Face value is the price of the security at the time of its Issue.  It doesn’t change over the time.  And guess what? Nominal Value and Par Value are just another name for it

Market Value

It is the price listed in the exchange or the price at which it is traded in Market

Book Value

It is the price calculated by the company and recorded in their books. They deduct all debt and arrive at a price or value. For shares it is calculated as: (Total Shareholders’ Equity – Preference Shares)/Number of Outstanding Shares

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In terms of Assets, Book value is what investors look at to know how much a company is worth if it ceased its operation today. All the tangible assets – Debt gives you Book Value. More the value better the position of the company.

Fair Value

It is rightly valuing or estimating the price of an asset or share or services. It is used by the investors to get a clear picture of prices which may otherwise be overpriced or under-priced by the market. A company calculates its fair value annually and in case of takeovers or mergers shares/assets are bought at the fair value. It is individually calculated based on various factors such as demand-supply, risk factors, returns, actual utility, etc

Bond fair value is formula based to calculate the present value of future cashflows.

Real Value

Real value is when the price is corrected for the inflation rate.

I hope this article helped you.

-D.V.P

What are Mutual Funds (MF) and its popular term NAV?

Our Market is flooded with Mutual funds from the last two decades.  What is it all about? Here’s a little gist of Mutual funds as an investment option.

Mutual funds are a collection of several different stocks and/or bonds in the market. It is easily available from either directly from the company or through a third party like banks and agents. Investing in a share directly might not be the most intelligent thing for a layman to do. So here Mutual funds are there to aid you, as it forms a group of shares of different level of risks or returns. It is managed by a professional team and manager.  So most people just invest in Mutual funds and feel financially relieved.  But like every coin it has its two sides, it is considered safe but has not always shown a positive result. I’ll give you a brief about it.

WHAT IS NAV?

Many companies these days claim they give the highest NAV in these many years. Common man doesn’t understand this jargon but does feel good to hear that ‘’something’’ about it is great.  NAV is the Net Asset Value of the Mutual Fund. If financially explained:

 All Cash Assets and Securities- Liabilities

In simple terms, it is the Value of the Overall Mutual Fund. The rate at which per share of MF is available. It keeps fluctuating daily as per the rate and volume of the MF traded.  Assume, if the NAV in total is Rs.40lakhs and the total number of shares of MF is 40,000 then,

NAV per share = Rs.4, 000,000/40,000 = Rs.100/-

So it is the Cost per share of MF.

BENEFITS/ LIMITATIONS

·         It’s professionally managed by experts who keep track of the financial market.

·         As companies buy shares in bulk from the market, a lot of transaction cost is saved

·         Diversified portfolio. It includes different shares so incase one particular share doesn’t churn out profit, it’s offset by other shares in the portfolio i.e. less risk

·         It’s simple to deal with

·         It is liquid, i.e. at any point they can withdraw and have their cash back

·         You don’t need huge amount to invest. Currently various monthly schemes are available as well.

·         Your payment includes the fees towards the manager, advertisement, processing, etc. whether you make profit or not.

Types

There are different types of MF. Some will give sure but low returns. Some might have higher returns but the risk involved would be equally high. The detailed should be discussed and found out before buying. Earnings would be dividends / interest or the profit as ‘’Capital Gain’’ i.e. when you sell it at a higher price.

Invest and follow-ups:

Companies might show a very rosy picture of their MFs. You as an investor should take care. After all it’s your money.

Check how much is the returns (profits) for not only the current year but if possible for the past 5 years or so. This will give you a better idea. And don’t fall for any company who might show very good returns for a year, other years are equally important. A consistent MF is safer to opt for.  But if possible you should also compare it with other competitor MFs in the market.  News and updates are always available to compare and find out the best ones.

You can follow up about the MF with Newspapers and Internet. Check how they are performing and its company’s news.

Conclusion:

If chosen rightly, they are a good investment option with reduced risk.

D.V.P