Mutual Fund Nav: What is Nav in Mutual Fund?

Last Updated: 6 Jul 2022

An Overview of Mutual Fund NAV

When investing in mutual funds for the first time, your financial advisor will tell you that the returns on a mutual fund are dependent on a number of factors. One of these factors that determine the value of your mutual fund investment is the fund’s NAV or Net Asset Value.

Net Asset Value (NAV)

In simple terms, net asset value refers to the market value of a mutual fund unit. Just like shares and stocks are priced per unit, a mutual fund’s net asset value is the price per share paid by the fund manager managing the mutual fund.

Role of NAV

Thus, the NAV is the market value of securities under a scheme. When expressed on a per-share basis, it represents the fund’s per unit market value. Investors buy or sell fund units based on the per-share value. As the value of securities in the fund increases, NAV also goes up and vice versa.

Methodology of calculating NAV

There are two methods to calculate the net asset value of a mutual fund – a general net asset value calculation and a daily net asset value calculation.

• General Net Asset Value Calculation

  When you start investing in a mutual fund, your fund manager will tell you the current net asset value of the mutual fund. If it is Rs.100, then each unit will be for Rs.100. This is just for the first time.
  Let’s say you have opted for a systematic investment plan (SIP) and aim to invest Rs.5000 per month. This means you will be required to pay Rs. 5000 monthly and your fund manager will purchase X number of units based on the net asset value of the fund on the day of purchase. In this case, you will be eligible to purchase 50 fund units for Rs. 5000, i.e. considering the net asset value is Rs. 100 per unit.
  If you are investing in an equity fund, the cost equals the total cost of all the shares purchased under that fund. The price of the fund changes as per the share market fluctuations, therefore, this type of portfolio has a daily value.

• Daily net asset value calculation

  Daily net asset value calculation If you are familiar with the stock market, you will know that the trading hours are from 9:00 am to 3:40 pm i.e. a pre-opening session from 9:00 to 9:15 AM, followed by trading hours from 9:15 am to 3:30 pm and a closing price calculation from 3:30 to 3:40 pm. During the last ten minutes, all asset management companies estimate their portfolio and calculate the closing price i.e. the net asset value of the mutual fund. The next morning, this fund will open at this net asset value.

How is NAV Calculated?

The mutual fund house or asset management company deducts all the outstanding liabilities and expenses to calculate net asset value (NAV) of the day by using the following formula – Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

Under a mutual fund scheme, assets are classified into two – liquid cash and securities. These assets also consider interest accrued and dividends. Further, the cash balance is added and then the money payable to others is subtracted to determine NAV. Finally, your fund manager also deducts the daily expense of managing the mutual fund.

Why is Net Asset Value Relevant to an Investor’s Investment Decision?

While the net asset value of a mutual fund does not, in any way, determine the future performance of a mutual fund, a mutual fund that has a higher NAV indicates that the fund has done well and is well managed. This can be one of the determining factors while choosing a mutual fund to invest in.