What is Net Asset Value (NAV) in mutual funds?

Net Asset Value, usually referred to as NAV, is the market price of each unit of a mutual fund. When a mutual fund scheme is launched through a New Fund Offer (NFO), the Asset Management Company (AMC) assigns the face value at which investors can buy units. After the NFO, the capital pooled from investors is used to invest in various assets and securities. As the value of assets changes in the market, the net asset value of the mutual fund changes with it.

If you want to know the net asset value meaning, just think of it as the latest market price of each unit of the mutual fund scheme.

Table of contents

What is the Net Value of Assets for Mutual Funds?
How to calculate NAV of mutual funds?
Importance of Net Asset Value (NAV) in mutual fund investment
Role of NAV in the performance of a fund
Low vs. high mutual fund NAV
Why you should not look at mutual fund NAV
Key takeaways
Opportunities that you can benefit from

What is the Net Value of Assets for Mutual Funds?

The net value of assets for a mutual fund is calculated at the end of each trading day. It’s components include:

Total market value of assets:
- This includes all the securities (like stocks, bonds, and cash equivalents) held by the mutual fund. Each security’s market value is based on the closing price on the day the NAV is calculated.
Liabilities:
- These are expenses or obligations owed by the mutual fund, including management fees, transaction fees, and any other accrued costs.
Outstanding units:
- These are the total number of units (or shares) currently held by all investors in the fund.

How to calculate NAV of mutual funds?

Now that you know all the components of NAV in a mutual fund is, you may be wondering how it is calculated. Here is the simple formula for calculating the Net Asset Value of a mutual fund:

NAV = {(Market Value of the Mutual Fund) + (Current Assets) – (Current Liabilities and Provision)} / (Total Number of Outstanding Units)

Example

To understand the NAV meaning, let’s take a simple example.

If a mutual fund has Rs. 4 crore invested in securities and Rs. 1 crore in cash. The total assets of the mutual fund stand at Rs. 5 crore (Rs. 4 crores + Rs. 1 crore). Now suppose the liabilities of the fund stand at Rs. 50 lakh. This makes the total value of the mutual funds to be Rs. 4.5 crore (Rs. 5 crores – Rs. 50 lakh). If the fund has 1 lakh outstanding units, then the Net Asset Value of the mutual fund would be Rs. 450 (Rs. 4.5 crore / 1 lakh).

Importance of Net Asset Value (NAV) in mutual fund investment

When investors want to invest in mutual funds, they look at the Net Asset Value of the mutual fund because it helps to:

Get daily updates:The Securities and Exchange Board of India (SEBI) mandates AMCs to declare the NAV for each scheme on a daily basis. Investors who want to redeem units or invest in a mutual fund can get daily updates by keeping an eye on the NAV. They can make a buying or selling decision based on the NAV and other performance parameters of the scheme.

As the NAV definition tells you, it is the price per unit of the mutual fund. However, it is important to consider other parameters in addition to the NAV before making an investment decision.

Role of NAV in the performance of a fund

NAV gives investors an overview of the performance of their mutual fund, though it is best analysed in combination with other performance metrics and benchmarks. Here are some things that NAV can indicate:

Performance:The change in NAV over a given period helps measure the fund’s rate of return.
Daily valuation indicator: NAV is recalculated daily based on the end-of-day market prices of the securities in the fund. This allows investors to understand the real-time value of their holdings and track short-term performance.
Entry and exit pricing: For open-end mutual funds, NAV is the price at which units are bought and sold. If the NAV at the time selling units is higher than the per-unit price at the time of investment, the investor makes gains.

Low vs. high mutual fund NAV

Although the NAV of a mutual fund represents the price of a single unit of that fund, it is important to bear in mind that this does not tell you the cost of the fund. A fund with a higher NAV does not necessarily mean that it is more 'expensive' than one with a lower NAV. While it is common for investors to assume that a mutual fund with a low NAV is cheaper (and therefore offers higher potential returns – this is a misconception, because the performance of a fund relies on its underlying assets, not on the NAV.

Why you should not look at mutual fund NAV

The performance of a mutual fund is neither reflected nor determined by its NAV at a given point in time. What’s more relevant is how the NAV of the fund has changed over a period of time. You can track the change in the NAV of a fund over a period of time to assess whether or not the fund has offered expected returns over a period of time. It can be said that it is not the absolute value of the NAV that matters as much as the relative growth or decline in the NAV over a period of time.

Moreover, the NAV only impacts the number of units one may purchase with a given capital. You will receive fewer units if you select a scheme with high NAV but the value of your investment will still remain the same. Any change in market conditions will have impact on the NAV based on change in price of underlying securities and the High or Low NAV will not make any difference in this regard.

Key takeaways

While NAV is an important data point representing the value of a mutual fund at a specific moment, it should not be the key factor driving your investment decisions. Thus, a mutual fund with a lower NAV isn't inherently more lucrative or less risky than a fund with a higher NAV. Instead of examining the NAV of a fund at the time of purchase, focus on aspects such as the portfolio of the mutual fund scheme, it’s investment objective and strategy, and the credibility of the fund manager. As always, it is recommended that you consult a financial advisor who can understand your investment goals.

Opportunities that you can benefit from:

At this point in time, the Indian market is booming with investment opportunities. Bajaj Finserv AMC has recently launched some new funds:

Bajaj Finserv Liquid Fund is an open-ended liquid scheme, suitable for investors looking for regular income over the short term.
Bajaj Finserv Overnight Fund is an open-ended debt scheme investing in overnight securities with relatively low interest rate risk and relatively low credit risk.
Bajaj Finserv Money Market Fund is suitable for investors who are seeking income over the short term.
Bajaj Finserv Flexi Cap Fund, an open-ended equity scheme investing across large-cap, mid- cap, and small-cap stocks.

Each of these investment vehicles provides professional management, and risk mitigation depending on asset class. However, it is important for investors to assess their objectives and risk tolerance - and consult a financial advisor - before making any mutual fund investments.

FAQ

What is NAV full form?

NAV full form in mutual fund is Net Asset Value

What does an NAV tell you?

The NAV of a fund tells you the per-unit market price of a mutual fund scheme. It is effectively the price at which you can buy units of a fund.

Does a low NAV mean a fund is a good investment opportunity?

No, a low NAV only means that the fund has a lesser market value. Nonetheless, it can be compared with the NAV of other mutual funds or the current market price of securities.

What should be the NAV of mutual funds?

There is no ‘desired’ price at which the NAV should trade at. For instance, a mutual fund scheme that has been in existence for several decades may have seen its NAV grow over time, while a new fund may have an NAV less than Rs.100. It does not have any bearing on the fund’s performance.

Should I buy when NAV is low?

An NAV should not be an indicator on whether you should buy or not buy a fund.

Are there any disadvantages to considering NAV as a sole investment criterion?

Yes, the NAV might not give a complete picture of a fund’s performance. It is better to consider other factors like fund managers expertise, expense ratio, investment objective, etc.

Can a fund with lower NAV be better than a fund with higher NAV?

Yes, there is a possibility that funds that have given higher return over a period, have lower NAV than the one’s with a higher NAV. Any fund’s performance depends on the returns provided over a period and not the current day NAV.

Can NAV be used as an indicator of fund’s risk level?

No, NAV does not reflect on the risk level of a fund. This is usually dependent on asset allocation, investment holdings, past performance, and the variety of securities in which investments have been done.

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.