If you’re new to investing in mutual funds, you may have come across the term “NAV” and wondered what it means. NAV, or net asset value, is a crucial metric to understand when investing in mutual funds.
In this beginner’s guide, we’ll explain what NAV is, how it’s calculated, and how it can impact your investments.
Mutual funds are an investment vehicle to invest in stocks, bonds, government securities, corporate securities and other such interest rate sensitive securities.
Investing is important to create wealth for various goals like buying a house, a dream car, children’s education, marriage for an individual. So. mutual funds offer a great investment option.
People who are not comfortable investing in stocks or these securities directly can choose to invest through mutual funds. Mutual funds allow investing in lumpsum or systematically through a systematic investment plan (SIP).
Mutual funds have many different types of fund schemes depending upon the investment objective and time horizon one has to stay invested while expecting best returns on their investment.
Investment in mutual funds is made on the basis of NAV of a fund scheme. NAV in mutual fund means net asset value.
NAV, or net asset value, is the value of a mutual fund’s assets minus its liabilities, divided by the number of outstanding shares. It is calculated at the end of each trading day and represents the price per unit of the mutual fund.
For example, if a mutual fund has assets worth $100 million and liabilities worth $10 million, and there are 1 million outstanding shares, the NAV would be $90 per share ($90 million net assets divided by 1 million shares). As the value of the mutual fund’s assets and liabilities change, so does the NAV.
NAVs represent the performance of mutual fund schemes. When a fund scheme is performing well, its NAV goes up. If its performance declines, its NAV also declines. This is just like stocks. As every stock in a market has its price, fund schemes have their NAV.
There are asset management companies (AMCs), and they ask the investors to invest with them. The money collected from all the investors is pooled at one place.
These AMCs hire the professionals called fund managers who have expertise in securities and launch a fund scheme. The fund managers buy number of stocks of different companies, bonds or other money market instruments out of the pooled money.
Hence a portfolio of securities (stocks, bonds etc.) is created. It involves stocks from the different sectors of the economy in different proportions.
Net asset value calculation is done after the valuation of the securities in the portfolio according to the market price. The process of valuation of each security in the portfolio is called as mark to market. The usual cut off time to determine NAV vary according to the scheme.
These portfolios are managed by these fund managers and are reviewed from time to time. These are usually long-term investments although the shuffling in portfolios goes on.
The NAV represents the price of one unit of the fund scheme. The NAVs are different from the stocks. While the prices of the stocks keep changing every second during the trading hours, the NAVs change only once daily.
How to Calculate Net Asset Value in Mutual Funds
Net Asset Value (NAV) is an important concept when investing in mutual funds. It represents the current market value of a mutual fund’s assets minus its liabilities and divided by the number of outstanding units.
The simple formula for mutual fund NAV calculation is Total Assets held by the fund scheme ÷ Number of outstanding units.
Total assets include the assets + capital gains on investments + any interest earned on securities + dividend gains – capital loss on investment – scheme related expenses.
Let us understand how to calculate NAV of mutual fund with example!
Suppose an AMC launches a mutual fund scheme with total number of units 1,00,000 for sale to investors. The face value of each unit is ₹10. Hence, the AMC raises 1,00,000 x 10 = ₹1,000,000 as total capital.
The AMC invested this capital and after some time the capital appreciation is ₹1,200,000. So, the NAV for is net assets ÷ number of units, that is, 1,200,000 ÷ 1,00,000 = ₹12.
Each AMC can launch any number of different schemes under its name and each scheme has different underlying portfolio structure. These can be equity schemes which have entire exposure to equities or balanced and liquid schemes which have bonds or debentures which are safer.
Each scheme has different NAV according to its portfolio which keeps changing according to the stocks and markets performance. In case of market up move, NAVs tend to rise while they fall when markets correct. The NAVs of the Equity Schemes change much rapidly than the Liquid Schemes or Ultra Short Term Schemes.
The units are allotted according to the NAV while investing in mutual funds.
Suppose you invest ₹100000 in a mutual fund scheme with NAV of ₹ 25, you will get 4000 units. If the NAV moves to ₹ 30 in near future, you will be making a profit of ₹ 5 per unit. Then, total profit on your investment is number of units x profit per unit.
Total profit = 4000 x 5 = ₹ 20,000.
How does NAV impact Mutual Fund Returns?
NAV is an important factor to consider when investing in mutual funds because it directly impacts your returns. When you buy shares of a mutual fund, you are essentially buying a portion of the fund’s assets.
As the value of those assets increases, so does the NAV, and the value of your shares. Conversely, if the value of the assets decreases, so does the NAV and the value of your shares.
It’s important to note that NAV includes fees or expenses associated with the mutual fund, which can also impact your returns. Higher the expenses, lower the NAV.
The NAV for mutual fund redemption is actual net asset value per unit on the day of order execution minus any exit load if applicable.
Suppose the NAV of a fund scheme is ₹ 15, and the applicable exit load is 1%, then the NAV for mutual fund redemption is ₹ 14.85.
Exit load = 1/100 x 15 = 0.15
NAV for redemption = 15 – 0.15 = ₹ 14.85
How to use NAV to Make Informed Investment Decisions
Understanding NAV is crucial when making informed investment decisions in mutual funds. By tracking the NAV over time, investors can see how the fund is performing and whether it is a good investment opportunity.
It’s important to remember that a high NAV does not necessarily mean a good investment, as it could be due to high expenses or overvaluation of assets.
Instead, investors should look for consistent growth in NAV over time and compare it to other similar funds to make informed decisions.
People generally come across a question; is mutual fund with low NAV better?
The answer is not really. What makes a NAV better for a mutual fund is not the value of NAV but the performance of the mutual fund scheme.
Higher NAV mutual fund scheme can be cheap to buy as compared to low NAV fund scheme. Although, low NAV results in purchasing a greater number of units of a fund scheme but still it can be a costly investment.
As we know the NAV of a fund scheme depends on the net asset value of the fund, the fund scheme with higher NAV is quite possibly giving better performance resulting in appreciation of net assets.
