What is NAV (Net Asset Value) in Mutual Funds? How To Calculate?

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.

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.

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.

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

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.

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.

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 .

Also Read : What Is Mutual Fund? How it Works?