Investors often get confused about the decimal places in the Net Asset Value (NAV) of various mutual funds that they have in their portfolio. One thing that a lot of them notice is that the number of decimal places is not uniform as some of them have the values upto two decimal places while others have four decimal places. A proper understanding of these details is essential if one has to know what the numbers mean and when these are significant and when they can be ignored. This will enable the investor to focus on the appropriate aspects while investing. Here is a detailed look at the entire issue and how this actually works.
Decimal places
The NAV represents the value of the units that are held by an investor in a mutual fund scheme. Unlike a share price where there is rupees and paise so one is able to know the exact value of the shares and its traded value the situation in case of a mutual fund NAV is different. There can be more than two decimal places in the NAV of the fund and this is nothing but a deeper reflection of the value of the holdings in the mutual fund. There is however a lot of confusion among investors when they see different decimal places as they wonder how this can actually be implemented but this is more for convenience in transacting.
Uniformity
In order that there is some element of uniformity the markets regulator Securities and Exchange Board of India has asked mutual funds to follow some guidelines with respect to the decimal places in the NAV. For index funds and all types of debt oriented funds the mutual funds are allowed to show the net asset value till four digits. On the other hand they can round off the digits to just two for all types of equity oriented funds other than index funds and balanced funds. However this ability to be able to round up to a lower figure of two decimal places for the equity and balanced funds does not mean that they have to compulsorily do so. If a fund wishes to do so then they can show four decimal places but this information has to be adequately disclosed in the scheme information document. Thus there can be a situation wherein even though some funds can show just two decimal places they are actually disclosing an additional two digits.
Analysis
While having knowledge about the number of decimal places is one thing what is more important for the investor is that they should be able to understand the information that is being conveyed by the value and the decimal places. By its very nature decimal places come after the main number and these show a further break up of the value so that one can get a precise idea of the situation. However in most case going deeper into the decimal places does not lead to any additional benefit for the investor because this does not convey something that is far more useful than what otherwise would be known. This is true for most mutual fund investments except those that are very large and that too invested for a very short period of time. The longer the time frame of the investment the lower would be the need for a greater dive into the decimal places. Also whether this is shown or not it will not have an impact on the value of the investment and hence for investors this might not end up doing much in terms of providing additional information. However knowing the details are always a plus point and this should be considered by the investor in their investment planning.