NAV (Net Asset Value): What is NAV, Formula And Its Roles

When you are learning about mutual funds, it is crucial to understand what NAV is and why it is so important.If you invest in mutual funds, you will get units of the fund at a specific value called NAV. The NAV of the units varies from one day to the next. Similarly, when you sell the mutual fund units, the unit's NAV is taken into consideration, and you will acquire the redemption amount as per this price.So, let's dive into what NAV is and how it is calculated.

NAV stands for Net Asset Value, which is the value of each unit of a mutual fund scheme in terms of the market. A mutual fund is a multi-layered financial vehicle that collects money from shareholders and invests in securities like the money market, stocks, bonds , and other kinds of assets. A fund manager handles the mutual fund and allocates the fund's assets. The manager aims to produce income or capital gains for the fund's investors. The mutual fund portfolio is organised and maintained to align with the investment objectives mentioned in the prospectus.A mutual fund is split into multiple units that investors, like you can buy or sell. Units represent your holdings in a mutual fund. It is the smallest portion of an investor's ownership in that mutual fund scheme.
The cost of each such unit is the NAV of a mutual fund.

NAV of mutual fund helps to track past performance of mutual fund schemes. The NAV does not have any impact on returns meaning high or low NAV does not make returns higher or lower. By studying the growth and degrowth of NAV for any fund, it indicates the funds growth pattern and helps to make more practical decisions. NAV is relevant for open-ended scheme because it helps in the buying/selling of units any time. There are two steps with respect to buying/selling mutual fund units:

• Debiting money from the bank account/placing request
• Money reaches the funds house collection account

Market value of a mutual fund is not the same as NAV. The market price depends on many factors like demand and supply, government policies, RBI interest rates, politics, etc. NAV is the nominal value of a unit of the mutual fund scheme which remains the same throughout the day while the market is operational.

Beginning 1st of February 2021, whenever a person invests in mutual funds, they will get the applicable NAV which is subject to availability and realisation of funds in AMC’s bank account, prior to applicable cut-off timings for purchase transactions. A delay in interbank transfer could imply that the funds reach the AMC on the following business day. The Securities and Exchange Board of India (SEBI) has restored the cut-off timings for NAV redemption and subscription of all mutual fund schemes to around 3 PM, irrespective of the investment amounts. However, the rules do not apply to overnight and liquid funds more than Rs. 2 lakhs. The subscription timing for overnight and liquid schemes is 1:30 PM and 3 PM for redemption. Also Read: When Do Mutual Funds Update The NAV?

To decide the present-day NAV, the administrative expenses or liabilities of the mutual fund scheme are subtracted from the total value of the cash and securities in the mutual fund's portfolio. This amount is then divided by the total outstanding units in that mutual fund.The NAV formula in mutual funds is as follows: Net Asset Value= [Assets- (Liabilities + Expenses)]/ Number of Outstanding Units. In this formula, the assets are cash in hand and securities. The securities include debt, equity or a combination of the two. Assets also include dividends and interests.Outstanding liabilities are administrative expenses and payments to others.When you subtract the liabilities from the total assets, you get the current assets.The current assets are then divided by the total number of outstanding units to get to the NAV of every unit.

The cut-off timing of the purchase of funds is 3 PMThe cut-off timing of the sale of funds is 3 PMThe NAV does not change when the stock market is operating during the day. Specific cut-off timings determine what NAV will apply to your investments. If you invest before the cut-off timing, the NAV of that day will apply, but if you invest after the cut-off timing, the NAV of the next day will apply. The Securities and Exchange Board of India (SEBI) has stipulated this rule.If your application to invest in a mutual fund reaches the Asset Management Company (AMC) before 3 PM, the current NAV will be applicable. If it reaches after 3 PM, the next day's NAV will apply.However, the cut-off timing for liquid and overnight funds is different.The cut-off timing for buying liquid and overnight funds is 1.30 PM.The cut-off timing for selling liquid or overnight funds is 3 PM. Also Read: Everything you need to know about Cut-Off Timings For Mutual Funds

The Net Asset Value is calculated when the market winds down for the day at 3.30 PM. The following day, the purchase and sale of the mutual fund units start again at this NAV. Again, after the market's closure, the calculation is carried out afresh, and a new NAV is arrived at. So, the NAV fluctuates daily but not while the market is operating.

You can purchase mutual funds any time of the day. Currently, the online facilities for mutual funds are very streamlined and one can invest in mutual funds from their home. However, you should remember that the NAV of a mutual fund applicable to the purchase or sale of units would be based on the information provided above. The NAV assigned to the transaction would be determined by the kind of fund the investors transacted with and the time of the transaction.

The change in value of the assets of a fund is directly proportional to the change in the holdings of the fund’s portfolio. This leads to a change in the NAV. Additionally, the NAV changes if fund’s liability changes. Also Read: The NAV Conundrum: Buying Mutual Funds With Low NAV vs High NAV

• SIPs For systematic investment planning payments, irrespective of the payment mode, the NAV is allotted on the day payment is realised at AMC’s collection account. This depends on the system of settlements as organised by the bank and that of automated mandates through which SIP instalments are processed.
• Lumpsum Investments For lumpsum purchases that are made by paying with a cheque then the investor cannot be given the same-day NAV because it is realised on a date in the future. Payments made by availing NEFT, RTGS, UPI or other banks allowing instant payments, the credit reaches the asset management company’s account immediately.
• Other Transactions For NFOs, the NAV of the allotment date is final irrespective of application or credit day amount. For switch transactions, it depends on pay-out cycle of switch-out fund.

Understanding the concept of NAV and the NAV applicable when a person purchases or sells mutual funds units is important. Although NAV does not represent the future prospects and dividends, it does give an idea about how the fund is performing on a day-to-day basis.