The Net Asset Value (NAV) is determined by dividing the total value of a fund's portfolio, which includes all cash and securities, minus any liabilities, by the number of outstanding shares. This calculation is crucial because it indicates the value of a single share in the fund, helping investors understand how much each share is worth at any given time. NAV serves as a key metric in assessing the performance of a fund and determining its fair value.
Mutual funds are one of the most popular investment options in India, as they offer diversification, professional management, and liquidity. However, before investing in any mutual fund scheme, it is important to understand how its performance and value are measured. One of the key indicators of a mutual fund’s performance is its net asset value or NAV. In this article, we will explain what NAV is, how it is calculated, and what it means for investors.
In this article, we will explain what NAV is, how it is calculated, and what it means for investors.
What is the Net Asset Value or NAV in mutual funds?
NAV, short for Net Asset Value, denotes the per-unit market worth of a mutual fund. It indicates the current market value per share of the fund, offering clarity on investment performance and facilitating transactions.
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Initial unit prices of mutual funds often start at Rs. 10 and increase as fund assets grow. A higher NAV typically signifies a more sought-after and well-performing fund.
NAV holds particular importance for open-end funds, where shares are not traded among shareholders like other investments.
Understanding mutual fund NAV helps investors evaluate their investment's performance, aiding decisions on continuation or withdrawal. Thus, NAV serves as a crucial benchmark in managing investment portfolios.
Formula for calculating the NAV of a mutual fund
The formula for calculating mutual fund NAV is:
NAV = (Total Assets - Total Liabilities) / Total units |
Here:
Assets = Market value of investments+ Receivables+ Accrued income+ other assets
Liabilities = Accrued expenses+ Other liabilities and payables
For example, suppose a mutual fund has Rs. 100 crore invested in securities and Rs. 10 crore in cash, for total assets of Rs 110 crore. The fund has liabilities of Rs. 5 crore, which include management fees payable, operating expenses and other charges payable. The fund has 10 crore units outstanding. The NAV of this mutual fund will be calculated as:
NAV = (110 crore – 5 crore) / 10 crore = Rs. 10.5 per unit
How to calculate the NAV of a mutual fund
NAV is calculated by the fund house at the end of each trading day, based on the closing market prices of the portfolio’s securities. The fund house updates the NAV on its website, on the websites of the Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI). Investors can also check the NAV of various mutual funds on online platforms like Bajaj Finserv.
How is the NAV relevant for investors?
The Net Asset Value (NAV) of a mutual fund plays a crucial role for investors, providing them with a measure of the fund's performance and assisting in decision-making. Here’s how NAV is relevant to investors:
- Reflects wealth growth: NAV captures the growth of an investment over time. For example, if the NAV increases from Rs. 200 to Rs. 240 in one year, it represents a 20% return on investment over that period. This helps investors track the performance of their investments.
- Facilitates comparison: While NAV itself isn’t directly compared, it allows investors to assess the returns generated by a fund. This makes it easier to compare funds within the same category or across different categories, enabling better selection based on performance.
- Indicates fund performance: The NAV serves as an important communication tool for mutual fund managers, giving investors insights into how the fund is performing. Since portfolio disclosures typically occur monthly, NAV provides a daily update on the fund's value.
- Warns of anomalies: If the NAV of a fund, particularly an equity fund, rises or falls significantly out of sync with its benchmark index, it serves as a signal for investors to investigate further. This could indicate issues or potential opportunities within the fund.
- Assesses risk-adjusted returns: NAV can be used in conjunction with ratios like Sharpe and Treynor to evaluate the return per unit of risk. This helps investors understand the risk-adjusted performance of their investments.
The relationship between NAV and mutual funds
NAV is an important indicator of a mutual fund’s performance, but it is not the only one. Investors should also consider other factors such as the fund’s objectives, strategy, portfolio composition, risk-return profile, expense ratio, and past returns.
NAV alone does not tell us how well a fund has performed over time, or how it compares with other funds in the same category or benchmark. For that, we need to look at the returns generated by the fund over different time periods, such as one year, three years, five years, or since inception. Returns are calculated by comparing the change in NAV over a period with the initial NAV at the beginning of the period.
When is NAV calculated?
NAV is calculated at the end of each trading day, after the stock markets close. However, the NAV that investors get when they buy or sell units of a mutual fund depends on the cut-off time of the fund.
The cut-off time is the time before which an investor’s application for purchase or redemption of units is accepted by the fund house for that day’s NAV. The cut-off time for equity and debt funds is 3 pm, while for liquid and overnight funds, it is 1.30 pm. If an investor submits the application before the cut-off time, they will get the same day’s NAV. If they submit it after the cut-off time, they will get the next business day’s NAV.
What does a high or low NAV indicate?
A common misconception among investors is that a low NAV means a cheap fund, and a high NAV means an expensive fund. However, this is not true. NAV is just a reflection of the market value of the fund’s assets, and it does not indicate the quality or potential of the fund.
A low NAV may mean that the fund is new, or that it has underperformed in the past. A high NAV may mean that the fund is old, or that it has performed well in the past.
The NAV of a fund does not affect its returns if the proportionate change in NAV is the same as the proportionate change in the market value of the fund’s assets. Therefore, investors should not base their investment decisions on the NAV of a fund, but on its performance, risk, and suitability for their goals.
Should one consider investing in mutual fund with a higher NAV?
The Net Asset Value (NAV) alone should not be the sole criterion for selecting mutual fund units. For example, a 15% growth in NAV from Rs. 50 is equivalent to a 15% growth from Rs. 500. What truly matters is the fund’s performance, not just its NAV. In this case, the NAV itself holds little significance. However, if a fund with a higher NAV also demonstrates strong historical performance, a positive outlook, and other favorable factors, it may be worth considering for investment. Investors need not worry about whether the NAV is overvalued or undervalued, as the NAV is not influenced by the demand for mutual fund units. Instead, it reflects the total value of the underlying assets.
What does a high or low mutual fund's NAV indicate?
A higher NAV means you can buy fewer units for the same investment compared to a scheme with a lower NAV. For instance, let's assume an investor chooses to invest Rs. 1,00,000 in two different schemes, A and B. Scheme A has an NAV of Rs. 20, while Scheme B has an NAV of Rs. 100, with both schemes offering a return of 10% per month. While Scheme A appears more affordable, as an investor can purchase 5,000 units, compared to just 1,000 units of Scheme B, the situation is not as straightforward. After one month, both schemes return 10%, which means Scheme A’s NAV increases to Rs. 22, and Scheme B’s NAV rises to Rs. 110. In both cases, the value of your Rs. 1,00,000 investment grows to Rs. 1,10,000. Therefore, the NAV itself does not determine the returns generated by a mutual fund scheme. As long as both schemes yield the same returns, the difference in NAV is not significant. The main difference is that the investor receives more units in Scheme A compared to Scheme B.
Factors affecting the NAV calculation
Understanding these factors helps in comprehending how NAV in mutual funds fluctuates and its significance in investment evaluation.
Factors Affecting NAV Calculation |
Description |
Market value of assets |
Determines NAV based on asset market values; increases in asset value raise NAV, and vice versa. |
Expense ratio |
Higher fees reduce NAV as management expenses are deducted from fund assets. |
Redemption fee |
Charges levied on selling shares reduce NAV by subtracting from the fund's total assets. |
Dividends and capital gains |
Distribution of profits to investors reduces NAV as these payments decrease fund assets. |
Sales charges (Front-end Load) |
Fees paid by investors when purchasing shares lower NAV by reducing the value of assets. |
Fund inflows and outflows |
Investor transactions impact NAV; more inflows increase fund assets and NAV, while outflows decrease them. |
Key takeaways
- Net Asset Value (NAV) is a critical metric for assessing mutual fund performance. It represents the per-unit market value of a fund's assets, calculated daily after market close.
- NAV is computed using the formula: NAV = (Total Assets - Total Liabilities) / Total units. It includes assets like market investments and cash, minus liabilities such as management fees and expenses.
- Fund houses update NAV daily and publish it on their websites, AMFI, and SEBI platforms. Online platforms like Bajaj Finserv also provide NAV information, aiding investor decision-making.
- While NAV reflects current fund value, it alone doesn’t indicate fund quality or potential. Investors must evaluate other factors like strategy, risk profile, expense ratio, and historical returns.
- NAV for transactions depends on the fund's cut-off time. Equity and debt funds accept applications until 3 pm, while liquid and overnight funds close at 1.30 pm.
- Investors should base decisions on a fund's performance and suitability rather than its NAV alone. Assessing returns over different periods and comparing with benchmarks is crucial.
Conclusion
NAV is an important metric to understand and track the value and performance of a mutual fund. However, it is not the only factor to consider while investing in a mutual fund. Investors should also look at the fund’s profile in detail, and compare it with other funds in the same category, before making any investments.
