What is NAV in Mutual Funds? Calculation, Formula, Example

If you had to choose between two mutual funds one with an NAV of ?20 and the other with an NAV of ?200 which one would you pick? Most new investors tend to view a fund with a lower NAV as the better option, but this is a major misconception. Understanding NAV (Net Asset Value) is not merely a routine query; it is one of the most crucial concepts for any investor to grasp. In this article, using simple language and real-life examples, we will explore what NAV is, how it is calculated, why it fluctuates daily, and its true significance when making investment decisions.

What is NAV in a Mutual Fund? 

NAV (Net Asset Value) represents the value per unit of a mutual fund. It indicates the net value of a single unit of the fund at the end of a trading day. NAV is calculated by subtracting total liabilities from total assets and dividing the result by the total number of outstanding units. The NAV of an open-ended mutual fund is updated after market close on every trading day.

Example: Suppose you invested Rs. 10,000 in a mutual fund when its NAV was Rs. 20. In this case, you would receive 500 units (10,000 ÷ 20). If the fund's NAV subsequently rises to Rs. 24, the total value of your 500 units would become Rs. 12,000. In other words, the number of units remains the same, but the value of your investment can increase or decrease based on changes in the NAV.

How is NAV Calculated? 

A mutual fund's NAV (Net Asset Value) is calculated by subtracting total liabilities from total assets. The resulting figure is then divided by the total number of outstanding units of the fund. This process yields the value of a single unit, known as the NAV.

NAV Formula

NAV = (Total Assets ? Total Liabilities) ÷ Total Outstanding Units 

• Total Assets : The total value of all investments made by the fund (shares, bonds, cash, and other securities)

• Total Liabilities: Fund expenses, management fees, and other liabilities

• Outstanding Units: Total mutual fund units held by investors

• NAV: Value per unit of a mutual fund

NAV Calculation Example

NAV Calculation 

Why Does NAV Change Every Day? 

A mutual fund's NAV changes every trading day because the market value of the fund's assets fluctuates constantly. After the market closes, the Asset Management Company (AMC) values ??the entire portfolio, and a new NAV is issued based on that valuation.

Portfolio Value Changes: 

If the prices of the stocks or bonds held by the fund rise or fall, the fund's total value changes, thereby affecting the NAV.

Market Movement: 

Fluctuations in the stock and bond markets have a direct impact on the fund's NAV.

Interest and Dividend Income: 

If the fund earns interest from bonds or receives dividends from companies, its total assets may increase, which can have a positive impact on the NAV.

Fund Expenses: 

Expenses related to the fund's operations such as management fees and other costs—are deducted from the total assets. This can lead to a slight change in the NAV.

Daily Portfolio Valuation: 

At the close of each trading day, all of the fund's holdings are valued based on their current market value, and a new NAV is declared accordingly.

When is NAV Updated? 

The NAV of an open-ended mutual fund is updated after market hours on every business day. The fund house (AMC) releases the new NAV after valuing the entire portfolio. Typically, investors can view the updated NAV for the day on the AMC and AMFI websites in the evening.

Important Points

• Open-ended Mutual Funds: A new NAV is released on every business day.

• Closed-ended Mutual Funds: The NAV is published regularly, but these funds are bought and sold on the exchange at market price.

• Business Days Only: A new NAV is not released on Saturdays, Sundays, or market holidays.

Note: The NAV applicable to your transaction depends not only on the investment date but also on factors such as the cut-off time prescribed by SEBI and the time of fund realization (when the funds are actually received by the fund).

Does a High NAV Mean the Mutual Fund is Expensive? 

No. A high NAV for a mutual fund does not mean it is expensive or will yield better returns. The NAV simply reflects the value per unit of the fund, not its quality or future performance.

Example: Suppose there are two mutual funds, and both have delivered an identical return of 12% over a year.

This example clearly demonstrates that despite the difference in NAV, both investments yielded the same return. Therefore, a mutual fund cannot be deemed cheap, expensive, or superior based solely on its NAV.

High NAV vs Low NAV 

NAV vs Share Price 

NAV in SIP vs Lump Sum Investment 

The role of NAV manifests differently in SIPs (Systematic Investment Plans) and lump sum investments. While both involve investing in the same mutual fund, the method of acquiring units based on the NAV differs.

NAV in SIP

In an SIP, each installment is invested at the applicable NAV for that day. Since the NAV can vary each month, the number of units acquired through each SIP installment also differs. When the NAV is low, the same investment amount yields more units, whereas a higher NAV results in fewer units. This process helps provide the benefit of Rupee Cost Averaging over the long term.

NAV in Lump Sum

In a lump sum investment, the entire investment amount is invested at once. Therefore, the applicable NAV for a single day applies to the entire amount, and all units are allotted simultaneously based on that NAV. Subsequently, the value of your investment fluctuates in the future in line with the rise or fall of the NAV.

Common Myths About NAV

New investors often have several misconceptions regarding NAV. For this reason, many choose mutual funds based solely on NAV, whereas a sound investment decision cannot be made based on NAV alone.

Myth 1: A mutual fund with a low NAV is always better.

Reality: A low NAV simply means the value per unit of the fund is low. It does not prove that the fund will yield better returns or is of superior quality.

Myth 2: A mutual fund with a high NAV is expensive.

Reality: A high NAV does not indicate that the fund is expensive; it merely reflects the fund's value per unit. The investment value and potential returns are determined by the fund's performance, not its NAV.

Myth 3: Funds with a high NAV yield lower returns.

Reality: A mutual fund's returns depend on its portfolio, investment strategy, and market performance. There is no direct correlation between a high or low NAV and future returns.

Myth 4: An NFO with an NAV of Rs. 10 is always a better investment.

Reality: While the initial NAV of a New Fund Offer (NFO) is often Rs. 10, this does not prove it is superior to an existing fund. Investment decisions should always be based on the fund's objective, portfolio, and strategy.

Myth 5: Future performance can be predicted by looking at the NAV.

Reality: The NAV only indicates the value per unit for a specific day. It offers no guarantee or indication regarding the returns the fund might generate in the future.

Factors to Check Instead of NAV 

Focusing solely on the NAV is not the right approach when selecting a mutual fund. Evaluate the key aspects listed below to make a better investment decision.

Historical Performance: 

Analyzing how the fund has performed over the long term across various market conditions helps in understanding its consistency.

Portfolio Quality: 

Examine the companies, sectors, or other assets the fund invests in. A strong portfolio can offer better prospects over the long term.

Expense Ratio: 

This represents the annual cost of managing the fund. A lower expense ratio can have a positive impact on your net returns over time.

Fund Manager: 

An experienced fund manager plays a crucial role in making sound investment decisions and managing the portfolio in response to changing market conditions.

Risk Level: 

Every mutual fund has a different risk level. Choose a fund that aligns with your investment goals and risk appetite.

Investment Objective: 

Before investing, ensure that the fund's objective aligns with your financial goals, such as wealth creation, regular income, or capital preservation.

Conclusion

Hopefully, you now have a clear understanding of what NAV in a mutual fund is. NAV simply indicates the value per unit of a mutual fund; it is not a measure of whether a fund is superior or expensive. When making an investment decision, do not rely solely on NAV; instead, evaluate important aspects such as the fund's performance, portfolio, risk, and expense ratio. A decision made with the right information is the first step towards a better investment.

FAQs

Q1. What is NAV in a Mutual Fund?

NAV (Net Asset Value) is the per-unit value of a mutual fund. It indicates the value of one unit at the end of a trading day.

Q2. How is NAV Calculated?

NAV is calculated using the formula (Total Assets ? Total Liabilities) ÷ Total Outstanding Units.

Q3. Why Does NAV Change Every Day?

NAV changes every trading day as the value of stocks, bonds, and other investments in a fund's portfolio changes.

Q4. Does a High NAV Mean a Better Mutual Fund?

No. A high NAV only reflects the per-unit value. It has no direct correlation to a fund's quality or returns.

Q5. Is a Low NAV Better for Investment?

No. A low NAV does not mean a better investment. Before investing, consider the fund's performance, portfolio, and risks.