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You might have come across the term NAV when reading your Mutual Fund Statement and have wondered what it means. Like a share that is listed on an exchange and carries a certain value based on the value of the business it represents, NAV also carries a value of the assets of the mutual fund it represents. Let’s understand NAV in detail.
What is a NAV?
NAV or Net Asset Value denotes the per unit market value of all the assets held by the mutual fund scheme less the liabilities. NAV is the price at which an investor buys or sells the units of the mutual fund just like an investor buys or sells a share listed on a stock exchange at its price. Usually, the initial per unit NAV of mutual fund schemes is ₹10 and as the market value of the assets held by the mutual fund scheme grows, the NAV scheme also grows. Therefore, there is a direct relationship between the scheme’s performance and the growth in its NAV. However, this also doesn’t mean that mutual fund schemes with lower NAV are poor performing mutual fund schemes.
Calculation of NAV
Let us understand how the NAV of any mutual fund scheme is calculated with a simple formula: Net Asset Value (NAV) = [Total Assets - Total Liabilities] / Total Outstanding Units in the scheme where, Total Assets = Value of all the assets held under the scheme as well as cash or cash equivalent assets. Total Liabilities = Interest/Money/Charges payable + Liabilities + Expense Ratio of the fund Let us now understand how the NAV of a fund is derived, with an example.
| (A) Market value of Equity Shares | ₹ 10,00,00,000 |
| (B) Market value of Debt Securities | ₹ 2,00,00,000 |
| (C) Cash Holdings | ₹ 50,00,000 |
| 1. Total Assets [A+B+C] | ₹ 12,50,00,000 |
| (D) Loans | ₹ 20,00,000 |
| (E) Other Liabilities | ₹ 10,00,000 |
| 2. Total Liabilities except Expense Ratio [D+E] | ₹ 30,00,000 |
| 3. Expense Ratio | 1% |
| Total number of outstanding units in the Mutual Fund Scheme | 1,00,00,000 |
NAV = [12,50,00,000 - (30,00,000 + (1%/365) x 12,20,00,000)]/1,00,00,000 = Rs. 12.20 As you can see NAV is the total value of assets per unit after deducting all the liabilities. The expense ratio is the % charged to the net assets of the fund. This charge is a fixed charge levied on the scheme’s net assets as a charge towards fund management fees and other fund management expenses. This NAV keeps on changing on day to day basis and is updated by the mutual fund houses after 3:30 PM when the Equity Markets close for the day. Now that you have understood how NAV is arrived at, it is important to know its relevance of it and how it affects the investor with regard to the performance of the fund. Also Read : Different Types of Mutual Fund Fees & Charges
Relevance of NAV to Investors
As you now know, NAV is the per unit value of total assets under the mutual fund scheme. So, it doesn’t really matter if two different funds have different NAV. Investors should not compare the NAV of two different schemes as a factor in deciding which scheme to invest in. Also, investors should not choose a mutual fund scheme just because the NAV is cheap or the NAV is higher than other funds. NAV simply denotes the value of assets and hence the comparison should be made based on the assets a mutual fund scheme holds and the performance of NAV i.e., the performance of the fund.However, the NAV that an investor gets does become a deciding factor for the number of units an investor will get in the mutual fund scheme. For example, if an Investor invests Rs. 10,000 in a Fund with a NAV of Rs. 10, he will get 1,000 units of that fund. Similarly, if he had invested with a NAV of Rs. 8, he would have got 1,250 units of that fund. So as you can see, investing at a lower NAV helped the investor to acquire more units with the same amount. But an investor shouldn’t invest in a mutual fund scheme just because the NAV is less.
Role of NAV in the Performance of the Fund
NAV just like the price of an equity share creates wealth for an investor with its rise over a period of time. It is true that the NAV that an investor get doesn’t really matter but the growth it has made in the past years as well as the performance in the future is what matters and impacts the investor’s wealth. Hence, it is important for an investor to analyse how the growth in NAV has been in a particular fund to decide whether they’ll invest in the scheme or not. If a particular fund’s NAV has seen good growth in the past, keeping other factors aside, this suggests that the value of the assets in that fund grew and the fund also created wealth for its existing investors. However, past performance does not guarantee future performance and also shouldn’t be the sole deciding factor to invest in the fund.
Effect of Investment Time on NAV
Yes, you read it right. The time of the day at which you invest in a mutual fund scheme has an effect on the NAV that you will get on your investments. SEBI has defined a cut-off time for every type of mutual fund scheme. And from February 2021, when an Investor invests in a mutual fund, they will get the NAV as per applicable cut-off timings only if the amount of investment has been received in the bank accounts of the AMC before the cut-off timing. This means that the NAV that you will get doesn’t depend on the time you placed your investment order but, on the time, when the investment amount gets credited to the bank account of AMC. This is commonly known as realisation-based NAV. Let’s take a look at the cut-off timings based on the types of Mutual Funds .
| Fund Type | Cut-off time | Transaction time before the cut-off time | Amount receipt time before the cut-off time | Applicable NAV |
| Overnight Mutual Funds & Liquid Mutual Funds |
1:30 PM for Purchase & 3:00 PM for Redemption | Yes | Yes | Previous Day NAV |
| Overnight Mutual Funds & Liquid Mutual Funds |
1:30 PM for Purchase & 3:00 PM for Redemption | Yes | No | Same Day NAV |
|
All other types of Mutual Funds except the ones above | 3:00 PM | Yes | Yes | Same Day NAV |
|
All other types of Mutual Funds except the ones above | 3:00 PM | Yes | No | Next Day NAV |
Also Read : What Is Mutual Fund? How it Works?
FAQS - FREQUENTLY ASKED QUESTIONS
Is NAV important while investing in Mutual Funds ?
Yes, NAV is important while investing in Mutual Funds because it is the price at which you will get the units of the Mutual Fund scheme you are investing in. Also, by looking at the historical NAV of the fund you are looking to invest in, helps you to understand whether the fund has created wealth for its past investors or not. However, NAV should not be the sole deciding factor for investing in a mutual fund scheme.
Where can I check the NAV of Mutual Fund schemes and are they updated daily ?
The NAV of all active mutual fund schemes is updated on each working day by 11 PM. One can check the NAV of all schemes on the AMFI website.
What affects the NAV of a Mutual Fund Scheme and how does it change ?
The NAV of a mutual fund scheme is affected by the assets that the scheme’s portfolio holds and any change in the market value of the assets brings a change in the NAV of the scheme.
Is NAV the same as the share price of a stock ?
No, the NAV and share price of a stock are not one and the same. NAV is the per unit value of the net assets of the scheme while the share price of a stock is the value at which one buys a piece of the business. Also, NAV is decided based on the market value of the assets in the scheme while the share price is decided based on various factors like business value, demand-supply, economic conditions, etc. So one should not confuse the NAV and share price of the stock as same.
Fund A has a higher NAV and Fund B has a lower NAV, which one should I prefer ?
You should not compare the NAVs of funds and decide which scheme to invest in based on the NAV. Comparing the NAV of two funds is of no use as NAV simply represents the per unit value of the assets in the mutual fund scheme. It is possible that both funds have different assets, and different number of outstanding units among other differences and as a result the NAV of these funds is also different. Hence comparing them yields no result. However, if you want to compare two funds, you can compare their growth over certain years and get an idea. This will give you an idea of which fund has performed better than the other.
Can I invest in a scheme when the NAV is low so that I get a higher number of units ?
Generally, a low NAV provides you with higher units in a mutual fund scheme compared to a higher NAV but this shouldn’t be a lone deciding factor for investment. If you are just looking at the price of NAV and considering it as a low NAV, then it means nothing and hence getting a higher number of units also mean nothing and it doesn’t guarantee performance in the future. However, if you are analysing the historical NAV and the NAV growth chart and think the NAV is low due to a correction in the market, then it implies that the NAV is also low compared to its usual price and hence you can invest when the NAV is low and therefore get a higher number of units.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
