Summary of this article
NAV shows per-unit value, not performance
High or low NAV doesn’t determine returns
NAV guides transactions, not investment decisions
Net Asset Value, or NAV, is one of the first numbers investors notice when they look at a mutual fund. It is also one of the most misunderstood. At its core, NAV is simply the per-unit value of a mutual fund scheme. It reflects what each unit of the fund is worth at a given point in time. It is basically the cost price of one unit of a mutual fund. What it does not do, however, is indicate how well or poorly a fund is performing. NAV is an accounting outcome, not a measure of performance.
How is NAV calculated?
The calculation of NAV follows a straightforward framework. At the end of every trading day, the fund’s portfolio is valued on a mark-to-market basis using closing market prices. Any accrued income is added to this value, while expenses and other liabilities are deducted. This results in the total net assets of the scheme. Dividing this figure by the total number of units outstanding gives the NAV per unit. Since asset values and expenses change daily, NAV is calculated and published once every day, after market close.
NAV= (Market value of Assets + Accrued Income -Liabilities) divided by Outstanding units
High NAV vs Low NAV
One of the most persistent myths around NAV is that a fund with a lower NAV is cheaper or offers better return potential than one with a higher NAV. Let’s look at some numbers to understand. Whether a fund starts at an NAV of Rs 10 or Rs 100, what ultimately matters is percentage growth, not the starting number. Suppose a fund moves from Rs 10 to Rs 20. There's another fund that moves from Rs 100 to Rs 200, both deliver the same 100 per cent return. This shows that the NAV level itself does not influence how much an investor earns. A high or low NAV does not indicate anything on its own. The NAV level itself has no impact on investor returns.
What does High NAV mean?
Over time, investors may notice that some funds have significantly higher NAVs than others. This happens because the fund has been around longer and has benefited from sustained compounding. Fewer dividend payouts and continuity in growth options also contribute to the NAV rising steadily over the years. A higher NAV, therefore, often reflects a longer compounding journey rather than anything about the valuation of the mutual fund.
NAV of Mutual Fund is NOT equal to Price of Stock
The distinction between NAV and stock prices is another important point. Mutual fund NAVs are based entirely on the value of the underlying assets and are calculated once a day. They are not influenced by demand and supply. Stock prices, on the other hand, move continuously during market hours and are driven by demand, supply, sentiment, and future expectations. This is why mutual funds always transact at NAV, while stocks do not.
Where is NAV useful?
NAV plays a role in specific investor transactions. It determines mutual fund unit allotment, redemption value, and Systematic Withdrawal Plan (SWP) calculations. Beyond this, NAV does not tell investors anything about return potential, fund quality, or risk-adjusted performance.
To conclude, a mutual fund's NAV is not a buy-sell signal. Investors are better off focusing on compounded annual growth rate (CAGR), risk ratios, consistency, and asset allocation, rather than being influenced by whether a fund’s NAV looks low or high.
