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

1. What is the Net Value of Assets for Mutual Funds?
2. How to calculate NAV of mutual funds?
3. Importance of Net Asset Value (NAV) in mutual fund investment
4. Role of NAV in the performance of a fund
5. What is the Net Asset Value formula?
6. How is NAV relevant for investors?

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:

1. 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.
2. Liabilities:
   • These are expenses or obligations owed by the mutual fund, including management fees, transaction fees, and any other accrued costs.
3. 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:

1. Performance: The change in NAV over a given period helps measure the fund’s rate of return.
2. 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.
3. 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.

What is the net asset value formula?

NAV deducts the fund’s liabilities from its assets and divides it by the number of units to get a per-unit value. The formula is:

NAV = (Total Assets - Total Liabilities) / Number of Outstanding Units

Total assets: This includes the market value of the securities (stocks, bonds, etc.) in the fund, along with cash and other assets.

Total liabilities: This accounts for expenses like management fees, operational costs, and other outstanding obligations.

Number of outstanding units: This represents the total number of units investors hold in the fund.

How is the net asset value relevant for investors?

The net asset value (NAV) is an important factor in how investors engage with mutual funds. Below is an overview of its significance:

• Determining purchase and redemption price: The price at which an investor buys mutual fund units is based on the current NAV. Similarly, when units are redeemed (sold), the value received depends on the NAV of that day.
• Tracking fund performance: Changes in NAV over time indicate how the fund is performing. Monitoring NAV movements helps investors understand how the fund’s underlying assets are doing. Comparing NAV growth against benchmark indices can provide insights into the fund manager’s effectiveness.
• Evaluating investment value: NAV gives a per-unit valuation of an investor’s holdings. This helps investors assess their current market position and track investment growth or decline.

Conclusion

The net asset value (NAV) is a fundamental measure for investors in the Indian mutual fund market. It offers a transparent and standardised way to assess the per-unit market value of a fund’s assets. This metric plays a key role in determining purchase and redemption prices, monitoring fund performance, and assessing investment value. While NAV provides valuable insight into a fund’s status, it should be evaluated alongside other factors such as the fund’s expense ratio, investment strategy, and risk profile.

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.