What Is NAV In Mutual Funds And How It Affects Your MF Investments

Net asset value or NAV is the unit price of a mutual fund. It informs you of the amount that one unit of a mutual fund is equal to at any given time. It is akin to the label on a commodity in a store. If you are interested in purchasing a product, you observe its price. Likewise, whenever you wish to purchase or sell one unit of a mutual fund, the NAV informs you about its price.

NAV is determined every day after the closing of the stock markets, since the worth of the investments done by the mutual fund continues to fluctuate throughout the day.

How Does NAV Work?

It is as simple as this: NAV = (Total Assets – Total Liabilities) / Number of Units Outstanding.

Total assets comprise the current market value of all investment made by the mutual fund, including stocks, bonds, and gold, in addition to cash held by the fund. Total liabilities represent the cost of expenses that have to be incurred by the fund, including the cost of managing the fund or operational expenses. Units outstanding indicate the aggregate quantity of mutual fund units purchased by investors.

In brief, NAV is the sum of the value of all that the mutual fund holds (after settling what it owes) divided by the number of units available.

An Example

Assume that a mutual fund has invested Rs 100 crore in shares and bonds, and it has Rs 5 crore in cash. Its total assets are Rs 105 crore. The fund has liabilities of Rs 5 crore. Therefore, the net assets are Rs 105 crore minus Rs 5 crore, which is Rs 100 crore.

If the fund has distributed 10 crore units to investors, then the NAV will be Rs 100 crore divided by 10 crore units = Rs 10 per unit.

That is to say, if you wish to purchase one unit of this fund today, you will pay Rs 10.

Why is NAV Significant?

NAV informs you about the price at which you can buy or sell units of mutual funds. For instance, if you invest Rs 5,000 in a fund that has an NAV of Rs 10, you will receive 500 units.

By comparing the NAV of a fund over a period of time, you can also see if your investment is growing. If the NAV of your fund increases from Rs 10 to Rs 12, your money has increased by 20 per cent.

NAV gives investors the knowledge of what the fair value of the fund is at any point in time, which gives rise to transparency and trust.

Common Misunderstanding: Is a Lower NAV Better?

Most people believe that a fund with a lower NAV is “cheaper” and thus better to invest in. This is not the case.

NAV only shows the present value of a fund’s investments. A new fund will have a naturally lower NAV, typically around Rs 10, as it has recently been launched. An older fund, with its investments increasing over time, will have a higher NAV.

When you invest, what matters is how well the fund’s investments perform in the future, not whether the NAV is high or low today. A fund with an NAV of Rs 100 could give you better returns than a fund with an NAV of Rs 10 if it is managed better.

It is as if selecting between two stores selling the same grade apples — one offering one apple for Rs 10 and another offering 10 apples for Rs 100. In either case, you are paying the same for each apple.

What Happens to NAV?

The NAV of a fund varies daily since the value of stocks, bonds, and other assets the fund possesses appreciates or depreciates each day. The fund can get dividends or interest, adding to its assets. Fees such as management fees deduct regularly, decreasing the NAV marginally.

All these factors make the NAV go up or down on a daily basis, and mutual funds report their revised NAV at the end of each trading day.

NAV is a basic, but a significant thing to know while investing in mutual funds. It informs you about the present price of a unit and lets you monitor your investment’s performance. But while selecting a mutual fund, don’t just look at NAV. Consider the past performance of the fund, who is handling it, the investment strategy, the risk level, and other relevant factors.