NAV Return

NAV return, or net asset value return, measures the performance of an entity by calculating the value of its assets minus its liabilities. This metric is commonly used to assess the performance of mutual funds, open-end funds, or exchange-traded funds (ETFs), as shares of these funds are usually bought at their NAV.

Let us understand what NAV return is, what its uses are, and the difference between NAV return and total return.

What is NAV return?

NAV return, or net asset value return, is a measure of the performance of a mutual fund minus liabilities. One of the key metrics to understanding the mutual fund’s performance, it reflects the percentage change in a fund's net asset value over a given time frame.

Understanding NAV return with an example

Similar to share prices, NAV represents the per-unit value of the fund. When you invest in a fund, you are assigned units. Consequently, NAV return illustrates how much your fund’s net asset value has risen or fallen over time. This information empowers investors to make decisions by monitoring the status of their mutual fund portfolio.

This article aims to delve into the concept of NAV return, its applications, how it is calculated, and more.

Formula of NAV return

NAV return represents the percentage change in a mutual fund's NAV compared to the previous period. To provide investors with a real-time valuation of the mutual fund, fund managers calculate NAV return every day after the market closes. That's why you may notice daily fluctuations in NAV returns. This variation is due to the market's volatility and the performance of the fund's underlying assets. Calculating NAV returns on a daily basis also ensures transparency and accuracy in reporting the fund's value.

There are two ways to calculate the NAV return of any mutual fund:

Calculate total NAV return: In this method, the NAV return is calculated based on the overall net asset value of the mutual fund.

Calculate per-share NAV return: In this method, NAV return is calculated based on the return per share of the mutual fund.

NAV return formula using total NAV

Net asset value (NAV) = Value of assets - Value of liabilities

NAV return = [(Total NAV at the end of period −Total NAV at the start of period) / Total NAV at the start of period] x 100

NAV return formula using NAV per share

NAV return = [(NAV per share at the end of the period−NAV per share at the start of the period) / NAV per share at the start of the period] x 100

How to calculate NAV return?

NAV return is calculated by subtracting the NAV per share at the start of the period from the NAV per share at the end of the period. Then, divide the result by the NAV per share at the start of the period and multiply by 100 to get the percentage return.

The NAV per share is calculated by subtracting the fund's total liabilities from its assets and dividing the result by the number of outstanding shares.

NAV per share = (total assets of the fund−total liabilities of the fund) / number of outstanding shares

Example of calculation of NAV Return

Let’s calculate the NAV return of a fund ABC between period 1 and period 2.

NAV of a fund ABC at period 1:

Total assets of the fund: Rs. 1 crore

Total liabilities of the fund: Rs. 5 lakh

Outstanding shares of the fund: 1 lakh

NAV per share = ((1 crore – 5 lakh) / 1 lakh) = (9,500,000 / 100,000) = 95

NAV of a fund ABC at period 2:

Total assets of the fund: Rs. 1.1 crore

Total liabilities of the fund: Rs. 6 lakh

Outstanding shares of the fund: 100,000

NAV per share= ((1.1 crore – 6 lakh) / 1 lakh) = (10,400,000 / 100,000) = 104

Calculating NAV return:

NAV return = [(Period 1 NAV - Period 2 NAV) / Period 1 NAV] x 100

NAV return = [(104 - 95) / 95] x 100

NAV return = (9 / 95) x 100 = 9.47%

The NAV return of fund ABC is 9.47%. This means that the fund grew by 9.47% during that period.

Application of NAV return

NAV return is an essential tool for both fund managers and investors, serving various functions in the investing space.

It offers investors a straightforward and reliable metric to monitor the progress of their mutual fund investments over time. Investors can evaluate the success of their investing strategy and make the required modifications to maximise returns by keeping an eye on NAV returns. This regular evaluation facilitates data-driven decision-making. On the basis of NAV returns, investors can decide whether to continue investing in a particular fund or shift to more profitable alternatives.

For fund managers, the NAV return serves as an indicator of how well and effectively the fund is managed. It enables them to evaluate the impact of their investment decisions, asset allocation strategies, and more. This insight is essential to maintain investors' trust and draw in new capital.

That said, the net asset value return only reflects the actual assets held in the fund at the end of every trading session. Dividends, interest paid to shareholders, and capital gains distributions are not included in this metric unless they were reinvested back into the fund.

Net asset value return vs. Total return

The NAV return is a measure for evaluating a fund's performance, but it might not provide the most comprehensive insights. This is because the NAV return doesn't take into account fund components like dividends, interest, or capital gains distributed to shareholders. Because of these exclusions, this metric is somewhat considered limited and may differ from the fund's total return.

In contrast, the total return is seen as a broader metric for assessing the performance of a mutual fund. It covers all sources of income generated by the fund during the specified period. It calculates the fund's entire return by accounting for changes in NAV as well as any income distributions, such as interest and dividends. Capital gains, losses from the securities held in the fund, and expenses charged by the fund are also included in the total return.

Therefore, total return is widely accepted as a more accurate indicator of how much return a shareholder would receive.

Suppose an investor seeks regular dividends. He often searches for funds that offer consistent dividend payouts. While he primarily concentrates on the fund's dividend yield, this investment strategy has risks. He might miss out on top-performing funds that generate better overall performance but don't pay dividends.

For example:

Fund A has a high return because its assets have appreciated significantly. It reinvests all earnings, so there's no dividend payout.

Fund B has a moderate NAV return but pays substantial dividends. Overall, it offers less return than Fund A.

Conclusion

When you invest in a mutual fund, the most important aspect is how good and consistent it is in delivering returns. You can understand this, along with its performance and overall health, by looking at the net asset value return of the fund. It gives you a clear idea about your future investment. Also, by comparing the NAV returns of different funds, you can identify which fund is performing better. This allows you to potentially invest in a better-performing fund and avail of good returns.

That said, alongside NAV returns, you should also check the total returns of the fund. Total return provides a comprehensive picture of the fund because it accounts for the fund's total income, distributions, liabilities, and more.

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