NAV Simplified

As a Mutual Fund investor, you have probably heard of Net Asset Value or NAV. However, you may wonder what it denotes and how it is calculated. In this article, we tell you what NAV is in a Mutual Fund, the myths around NAV, and what goes into its calculation. 

A Mutual fund's Net Asset Value is the per-unit price of the fund. Based on this value, investors buy or redeem their Mutual Fund units, which determines a Mutual fund's performance. Just like you have a stock price for stocks, you have a NAV for Mutual Funds, which also changes daily. 

How do you calculate NAV in a mutual fund?

Net asset value is calculated by taking the fair market price of the securities owned by the mutual fund scheme and other assets and receivables owed to the fund, subtracting the liabilities the fund owes, which include fund management fees payable or even redemption claims. The result is divided by the number of units issued to investors on a given date. 

Myths around NAV

Should you invest in a Mutual fund based on its NAV? If this question is cropped up in your mind, continue reading. Instead of looking at the NAV per unit, you must look at how much your investment as a whole has appreciated. NAV is a reference point for the number of units a Mutual fund scheme has issued. 

Imagine if there are 2 Mutual funds - Mutual fund A with NAV of Rs. 100 and Mutual fund B with NAV of Rs. 50. If you've invested Rs. 1,000 in each of them, you have 10 units in Mutual fund A and 20 units in Mutual fund B. Now, let's say a stock owned by both the schemes in the same proportion gained and amounted to a 20% gain for both schemes. This means the NAV of Mutual fund A appreciates to Rs. 120 and that of Mutual fund B to Rs. 60. Your investment amount in both will go up to Rs. 1200. This shows NAV doesn't matter much when it comes to deciding on how to invest.

This example also tells you how NAV is different from stock price. Where stock price is impacted by investor perceptions and the demand and supply of stock, NAV is calculated based on the value of these underlying stocks. 

The NAV is used to calculate a fund's performance across different time intervals.

High NAV or Low NAV

In the example above, even though Mutual Fund A had a high NAV and Mutual Fund B had a low NAV, the overall investment increased by the same percentage. Thus, NAV shouldn't determine whether you should invest in a Mutual fund. Your investment decision should be determined by your risk appetite, investment objective, fund manager performance and whether it aligns with the Mutual fund. 

Does NAV change daily?

Since the market price of the investments made by the fund changes daily, the NAV also changes daily. If the investments made by the Mutual Fund go up, the NAV goes up and vice versa. But where stock prices change by the minute during trading hours, the NAV is generally calculated only once at the end of the day.

What is the cut-off time for NAV?

Here's another interesting point: If you want to buy the units of a mutual fund at the current NAV, you need to punch in the order before 3 pm on the trading day. If you do it after, you'll get the units based on NAV the next day.

Where can you find the NAV?

You can find the NAV of a scheme on their respective websites and also on the AMFI website, where the NAVs of the schemes are calculated and updated every trading day.

 

Disclaimer

Mutual fund investments are subject to market risks, read all scheme related documents carefully.