What is the meaning of face value?

The face value is the value assigned to each unit of mutual fund during its New Fund Offer For example, if the face value of a mutual fund is Rs. 10, it means that every unit of that mutual fund scheme has a value Rs. 10.

• Table of contents

1. What is the difference between face value and Net Asset Value (NAV)
2. Face value definition in currency notes
3. Share or bond certificate
4. Importance of face value
5. Formula of face value
6. Difference between the face value and market value
7. Modifying the face value of stocks

What is the difference between face value and Net Asset Value (NAV)

While face value remains fixed and is applicable during the New Fund Offer (NFO), the Net asset Value (NAV) keeps changing. It can be higher or lower than the face value based on the scheme’s performance. For instance, a mutual fund scheme with a face value of Rs. 10 may be having a NAV of Rs. 15 in a bull market if the scheme is doing well. But in case of losses, its NAV can fall below the face value. The returns on an investment are influenced by the rise and fall of the NAV. While this value can fluctuate frequently, making it impossible to predict the returns on an investment, online tools such as a compound calculator can help you get a rough estimate of the potential growth on your investment. Based on your investment amount, tenure and expected returns, the calculator tells you what the size of your final corpus can potentially be. Do note, however, that the calculator uses a fixed rate of return for its estimates, while real returns will fluctuate and are not guaranteed. Nevertheless, the face value will always say Rs. 10 per unit.

Face value definition in currency notes

In India, currency notes issued by the Reserve Bank of India have a denominated face value printed on them. For example, a Rs. 10 note says 'ten rupees' on it, while a Rs. 500 note says 'five hundred rupees'. The holder of these notes can redeem them for goods and services of equivalent face value from the RBI or banks. For instance, a person can buy goods worth Rs. 100 by handing over a Rs. 100 banknotes to the shopkeeper. Even if inflation increases costs over the years, the face value of currency notes remains unchanged until the government decides to demonetise old notes or issue new ones. For example, the face value of the old Rs. 500 and Rs. 1,000 notes became zero post demonetisation in 2016.

Face value of share or bond

Companies issue shares and bonds with a predefined value known as face value, which is typically determined by the corporation itself. Several factors influence this assignment.

Share certificates are official documents issued by companies offering shares in the market. These certificates specify details such as face value, share class, issue dates, and other key information.

The face value of shares and bonds is explicitly mentioned on their respective certificates.

Importance of face value

Face value plays an important role for book-keeping purposes. It also helps assess an asset’s market value when compared to its face value. Investors should note that market prices of securities fluctuate based on demand, interest rates, and other factors, often diverging from the face value.
In the case of mutual funds, too, the face value serves as a reference point to assess whether the current market value (reflected by the NAV) has increased or decreased from the initial buying price. However, the net asset value (NAV) is more important as it reflects the present market value of a fund’s holdings.

Formula of face value

The face value of a stock, also referred to as the "nominal value" or "par value," can be expressed using the following formula:

Face Value of a Share = Equity Share Capital / Numbers of Outstanding Shares

Difference between the face value and market value

As mentioned, face value is the original price of the security at the time it was issued, while market value is the amount that it is presently worth in the market, which can be higher or lower than the face value. Here is how the two metrics stack up on different parameters:

Stability: Face value remains constant; NAV or market value varies.
Relevance: Face value has minimal practical use; market value is the key metric for investors.
Purpose: Face value is a nominal figure; market value indicates the present worth of investment.
Calculation: Face value is set at inception, market value is based on real-time market movements.
Investor impact: Investment decisions should be based on market value rather than face value.

Modifying the face value of stocks

Companies can modify the face value of their shares through certain corporate actions:

Stock splits: A stock split increases the number of outstanding shares by dividing each existing share into multiple shares. This proportionally reduces the face value of each share. Stock splits can make shares more accessible to retail investors, potentially enhancing liquidity.

Consolidation (reverse stock split): A consolidation reduces the number of outstanding shares by merging multiple shares into one. This increases the face value proportionally. For example, in a 1-for-2 consolidation, a face value of ₹10 would become ₹20. Companies may consolidate shares to enhance perceived stock value or meet listing requirements.

Conclusion

In India, face value plays different roles in mutual funds and stocks, though its practical significance for investors has changed over time. While face value remains a structural element in financial instruments, it is not a key factor in investment decisions. Investors should focus on NAV for mutual funds and market value as well as fundamental financial metrics for stocks.

FAQs

How is a share’s face value determined?

A company's board of directors sets the face value of a share at the time of incorporation or when issuing new shares. This is a nominal amount mentioned on the share certificate, usually Rs 1, Rs 10, or Rs 100.

What is face value meaning in stock market?

Face value in the stock market refers to the nominal price of a share as recorded on the share certificate. It is used to determine certain corporate actions, such as dividends, which may be declared as a percentage of face value. This is different from the market value of the share.

What is the benefit of face value?

Face value is mainly used for book-keeping and to calculate certain corporate actions, such as dividends declared as a percentage of face value. It also helps in determining the premium when issuing new shares. However, it has a minimal influence on daily stock market trading.

How can the share’s face value be reduced?

A company can lower the face value of its shares through a stock split or adjust it upward through a share consolidation (reverse stock split). These changes require approval from the board of directors and shareholders. A stock split decreases face value while increasing the number of shares, whereas share consolidation raises face value while reducing the number of shares.

What is the face value of an initial public offering (IPO) share?

The face value of an IPO share is determined by the company issuing the shares. It's a nominal value, typically a small amount like Rs 1, Rs 2, Rs 5, or Rs 10. However, the actual issue price of the IPO shares is different from the face value as it is determined by market value, investor interest etc.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.