What is the Net Asset Value (NAV) of a mutual fund?

Net Asset Value (NAV) meant the market value of a mutual fund unit. It is the price at which investors buy and sell the fund shares of a fund company to a fund company. The resulting figure is referred to as NAV if you add up the market value of all the shares in the fund and divide it by the number of total mutual fund units, you will find the Net Asset Value.

Why is NAV important for investors?

To base your investment decision on the NAV of a mutual fund scheme is not smart. NAV does not represent the mutual fund scheme’s future prospects. It is just the cumulative amount of shares under the mutual fund scheme minus liabilities and expenses.

A higher NAV thus means that the investments in the scheme have prospered very well or the scheme has been around for a long period of time. Investors should concentrate on the performance of the scheme and the returns generated when investing in a mutual fund scheme.


How is NAV calculated?

By dividing the total net assets by the total number of units provided, we calculate the NAV of a mutual fund. To obtain a fund’s overall net assets, deduct any liabilities from the current value of the assets of the mutual fund and then divide the amount by the total number of outstanding units. The resulting amount is the mutual fund’s NAV.

General NAV Calculation

If there is a NAV of ₹100 for a mutual fund, then that is how much you will have to pay for one unit of that mutual fund. Conversely, if you invest ₹1000 in a mutual fund with a net asset value of ₹100, then 10 units of that fund will be required.

The overall cost of all the shares it has is the cost of an equity fund. These price fluctuations are subject to changes according to the equity market, which is why the portfolio of mutual funds comes with a regular value.

Daily NAV Calculation

When the stock market closes, all mutual companies estimate their portfolio value. The market opens again the next day with the previous day’s closing share prices. To measure the day’s Net Asset Value (NAV) using the specified formula, the fund house deducts all the outstanding liabilities and expenses accordingly.

NAV = [Assets – (Liabilities + Expenses)] / Number of outstanding units

The mutual fund scheme’s assets are split into shares and liquid cash. Securities include shares, debentures, bonds, as well as business records. Often included in the assets are interest accrued and dividends.

To calculate the fund’s net asset value, the cash balance in the bank account is added and the money payable to others is subtracted. In order to maintain a portfolio, the fund manager also deducts the regular costs.

When you divide the total asset value by the number of mutual fund units issued so far, you get the cost per unit per day.

Value of Mutual Funds vs. Stocks

The NAV pricing scheme for the trading of mutual fund securities varies considerably from the method for common shares or equities issued by corporations and listed on the stock exchange.

Via an initial public offering (IPO), a corporation issues a limited number of equity shares and probably subsequent additional offers that are then exchanged on markets. Stock prices are fixed by market forces or by the supply and demand of the shares. For stocks, the value or pricing mechanism is based solely on market demand.

On the other hand, the value of a mutual fund is measured by the amount invested in the fund and the expense of operating it and its outstanding shares. The NAV doesn’t, however, provide the fund with a performance metric. The NAV of a mutual fund is relatively insignificant in assessing the success of a fund since mutual funds allocate nearly all their profits and realized capital gains to fund shareholders. Instead, the overall return, which encompasses how well the underlying assets have done and any dividends paid, is better judged by a mutual fund.

What is the difference between NAV & Market Price?

Investors prefer to believe that an equity share’s net asset value and market price are the same, which is not true. They may sell or buy units of mutual funds at NAV, but it should not be confused with a unit’s market price.

Broadly speaking, the share price of stocks is what NAV is for mutual funds. You buy and sell the units at the prevailing NAV of a mutual fund scheme. Almost every minute, the share price of a stock fluctuates, while the NAV of a fund scheme is measured at the end of each business day.

Misconceptions about NAV

Many investors misunderstand how NAV works. As a result, they end up making poor investment choices.

1. ‘Schemes with low NAVs are cheaper.’

Suppose you are investing in two mutual fund schemes with similar portfolios for the same sum. You will get more mutual fund units from the scheme with the lower NAV. This does not mean, however, that it is cheaper; the NAV is not an accurate indicator of whether a fund is expensive or not.

2. ‘Funds with higher NAVs are better.’

The NAV will not provide any clues about the growth prospects of a mutual fund on any given day. Alternatively, you ought to study the fund’s NAV in the recent past. Comparing these historical figures will assist you in determining how a fund will work in the future.

3. ‘Book profits when the NAV rises.’

You could exit an investment with good longer-term prospects by redeeming fund units when the NAV increases. And you could continue to hang on to support units that are declining or stagnant with their NAVs. Rather than concentrate on the NAV, review the efficiency of the fund until any units are redeemed. It might be a smart idea to keep investing if a fund performs well.

Role of NAV in a fund’s performance

Many investors assume that the net asset value is equivalent to the market price of a stock. This leads them to assume that a lower net asset value fund is cheaper and, thus, a better investment. In fact, it is not an indication of the success of mutual funds. A lower valuation alone does not, or vice versa, make a fund a better investment. Hence, selecting a mutual fund should not be the only deciding factor.

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