When investing in mutual funds, you may come across the term ‘face value’, especially during a New Fund Offer (NFO). The face value refers to the value assigned to each unit of a mutual fund at the time of its launch. This is the initial price at which investors can purchase units of the scheme. 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 of Rs. 10.
Table of contents
- What is face value?
- What is the difference between face value and Net Asset Value (NAV)
- Face value definition in currency notes
- Share or bond certificate
- Importance of face value
- Formula of face value
- Role of face value in IPOs and dividends
- Does face value affect investors?
- Difference between the face value and market value
- Modifying the face value of stocks
- Common misconceptions about the face value
What is face value?
Face value, also known as par value, is the nominal value assigned to a financial security, such as a share or bond, when it is issued. It is decided by the issuing company and recorded in its books and on share or bond certificates. In the share market, it represents the base value of a share for accounting purposes and is usually a small amount, such as Rs. 1, Rs. 2, Rs. 5, or Rs. 10.
For example, a company may issue shares with a face value of Rs. 10 during an Initial Public Offering (IPO), but the market price may be higher or lower depending on demand and market conditions. In bonds, face value refers to the amount repaid at maturity, along with any applicable interest, and it does not indicate the current market value of the security.
What is the difference between face value and Net Asset Value (NAV)
Face value and Net Asset Value (NAV) are two commonly used terms in mutual fund investing, but they serve different purposes. Understanding how they differ can help investors better interpret fund performance and pricing:
| Parameter | Face Value | Net Asset Value (NAV) |
| Definition | The fixed value assigned to each unit during the New Fund Offer (NFO) | The current value of a mutual fund unit based on the scheme’s performance |
| Nature | Remains constant | Changes regularly based on market movements |
| Timing | Applicable at the time of launch (NFO) | Calculated daily after the fund is launched |
| Value Movement | Does not change (e.g., Rs. 10 per unit) | May be higher or lower than face value |
| Example | Remains Rs. 10 per unit | May be Rs. 15 in a bull market or fall below Rs. 10 in a weak market |
| Impact on Returns | Does not impact returns directly | Returns are influenced by changes in NAV |
| Predictability | Fixed and predictable | Fluctuates frequently, making returns uncertain |
| Use in Calculations | Limited practical use after NFO | Used to track performance and estimate investment value, including through tools such as a compound calculator |
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 use them to pay for goods and services of equivalent value.
For instance, a person can buy goods worth Rs. 100 by handing over a Rs. 100 banknote 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.
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 company itself. This value may be influenced by factors such as regulatory requirements and internal financial structuring.
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 serves several important functions in financial instruments and helps investors interpret pricing and valuation:
- Face value is primarily used for book-keeping and accounting purposes.
- It can help compare an asset’s market value with its nominal value.
- Market prices of securities may fluctuate due to factors such as demand, interest rates, and overall market conditions, often differing from face value.
- In mutual funds, face value may act as a reference point to assess changes in value over time.
- However, the Net Asset Value (NAV) is more relevant as it reflects the current market value of a fund’s holdings.
Formula of face value
The face value of a share, also known as its nominal or par value, can be calculated using the following formula:
Face Value of a Share = Total Equity Share Capital / Number of Outstanding Shares
This formula indicates that the face value represents the per-share value of a company’s equity capital.
For example, if a company has an equity share capital of Rs. 1,00,000 divided into 10,000 shares, the face value of each share would be Rs. 10.
While this calculation helps explain how face value is derived, in practice, it is typically determined by the company at the time of issuing shares and remains fixed unless changed through corporate actions.
Role of face value in IPOs and dividends
Face value plays a role in both Initial Public Offerings (IPOs) and dividend calculations, helping define how shares are issued and how returns may be expressed:
- IPOs: In an Initial Public Offering (IPO), face value is the nominal value of a company’s shares set by the issuer. The issue price is often higher than the face value, with the difference referred to as a premium. While face value provides a base value, the issue price may be influenced by demand, company fundamentals, and market conditions.
- Dividends: Dividends are a portion of a company’s profits distributed to shareholders. They are often declared as a percentage of the face value, which helps standardise payouts. For example, a 50% dividend on a share with a face value of Rs. 10 results in a dividend of Rs. 5 per share.
Does face value affect investors?
Face value may not directly influence investment decisions, but it can provide useful context for understanding certain aspects of a security:
- It can help interpret dividend declarations, which are often expressed as a percentage of the face value.
- It may assist in understanding corporate actions such as stock splits or consolidations, where the face value is adjusted.
- It can offer insights into a company’s equity structure and how its share capital is organised.
While most investors tend to focus on market price and returns, understanding face value may help provide a more complete view of how a security is structured.
Difference between the face value and market value
Face value and market value are two distinct concepts that help investors understand how a security is structured and priced. Knowing the difference between the two can help in better evaluating investment decisions and market behaviour:
| Parameter | Face Value | Market Value |
| Definition | The nominal value of a security at the time of issuance | The current price at which the security is traded in the market |
| Stability | Remains constant | Fluctuates based on market conditions |
| Relevance | Has limited practical use for investors | Is a key metric for investment decisions |
| Purpose | Represents a base or nominal value | Indicates the current worth of the investment |
| Calculation | Set at the time of issuance | Determined by demand, supply, and market movements |
| Investor Impact | May not directly influence decisions | Plays a central role in buying and selling decisions |
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 potentially enhance perceived stock value or meet listing requirements.
Common misconceptions about the face value
Face value is often misunderstood, and clarifying these misconceptions may help investors make more informed decisions:
- Face value does not determine the overall worth of a company, which is influenced by factors such as earnings, performance, and market capitalisation.
- Face value does not directly impact the market price of a share, which may fluctuate based on demand, supply, and market conditions.
- Face value is not the same as market value, as the two represent different aspects of a security.
- Shares can trade below their face value in certain situations, such as during weak financial performance or adverse market conditions.
- Investors receive the prevailing market price, and not the face value, when they sell their shares.
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 bookkeeping 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.
Is it possible for face value to start to rise?
Yes, a company may increase the face value of its shares through a corporate action known as share consolidation (or reverse stock split). This reduces the number of outstanding shares while proportionally increasing the face value, subject to necessary approvals.
What is the minimum face value of a share?
There is no fixed minimum face value prescribed universally, and companies may choose a nominal value such as Rs. 1, Rs. 2, Rs. 5, or Rs. 10 based on their capital structure and regulatory guidelines.
How can the share’s face value be reduced?
A company can reduce the face value of its shares through a stock split, where each share is divided into multiple shares, thereby lowering the face value while increasing the total number of shares.
What is a bond’s par value?
A bond’s par value, also known as its face value, is the amount that the issuer agrees to repay to the investor at maturity, along with any applicable interest payments during the tenure.
Which face value is good?
There is no “good” or “bad” face value, as it does not reflect the quality or performance of a company. Investors may benefit more from focusing on factors such as fundamentals, market value, and returns.
What are examples of face value?
Common examples include shares issued with face values such as Rs. 1, Rs. 2, Rs. 5, or Rs. 10, as well as bonds that may have face values like Rs. 1,000, which represents the amount repaid at maturity.
