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

Mutual fund investments are a popular avenue for growing and diversifying your portfolio. Among the various factors to consider before investing, the relevance of NAV in mutual funds stands out. Understanding what is NAV in mutual funds and its impact on the overall performance of funds is essential. Let's have a look at these aspects in detail. 

Understanding NAV Meaning in Mutual Funds

NAV full form in mutual fund is Net Asset Value. It is an important metric that assesses the value of a mutual fund. It is a crucial metric that evaluates the value of a mutual fund, representing the per-unit value of the fund’s assets. It is the price at which investors can buy or redeem their units.

Each day after the market closes, the NAV of the portfolio is calculated based on the market value of its holdings, ensuring that investors receive an accurate price for their investments. NAV helps you determine which fund to invest in. Usually, the unit cost of mutual funds starts at Rs.10 when they launch and increases with asset growth. 

How is NAV Calculated? 

Now that we understand what is NAV in mutual funds, let's see how to calculate the NAV of any mutual fund.

NAV = (Total Assets - Total Liabilities)/ Total Number of Units

Here,

Assets = Value of all the assets under the scheme + the cash holdings

Liabilities = Payable money/interest (other liabilities) + expense ratio

While calculating mutual fund NAV, it is essential to put the correct items under the headings, such as assets and liabilities. This ensures the accurate computation of portfolio value. 

What Does NAV in Mutual Funds Represent? 

NAV in mutual funds represents how a fund performs daily. It is calculated by considering the valuation of both liquid and non-liquid assets. It represents the price at which investors can buy or redeem fund units and reflects the fund's market value at the end of each trading day. This helps investors analyze any mutual fund's NAV, past returns, and other aspects to make more informed decisions. 

High NAV vs Low NAV: Does it Matter? 

The NAV of a particular mutual fund mainly indicates the per-unit value of the fund and can also be used to derive the historical value of the fund. However, it is not necessary for a fund with a high NAV is supposed to be considered as a better Fund as opposed to funds with a low NAV.

While the high NAV of a fund can come from its historical performance, there is no guarantee that these funds will perform better than funds having low NAV in the future. Rather, in order to choose a good fund, one should consider the quality of assets allocated to the particular portfolio, its management of the fund and the alignment of funds with its objectives.

NAV vs Share Price: Understanding the Difference

Many investors believe that net asset value is the same as the share price (price of equity shares). However, this is different. NAV does not correlate with the share price. Share prices tend to fluctuate according to market trends. When the demand for shares increases, its price rises, and vice versa.

On the other hand, NAV is calculated at the end of the trading day considering the asset growth in that fund and deducting the expenses incurred during the period. Here, the demand or supply of the particular fund has no influence over its NAV.

How Often is NAV Updated?

Mutual funds update their NAV on the fund house's official website. NAV is calculated daily when the market closes after all the transactions are settled. Usually, NAV is updated after the market hours on each working day. The NAV may not be updated on holidays or non-working days. In these cases, the update remains deferred till the next business day. 

Factors Influencing NAV in Mutual Funds

Some of the key factors that influence the computation of the Net Asset Value of any mutual fund are as follows:

NAV in Different Types of Mutual Funds

Net Asset Value varies depending on the types of mutual funds. There are usually three types of funds; let's check how NAV is calculated in each of them:

• Open-end mutual funds: NAV is calculated daily in this type of fund. It reflects the market value at the end of the day. 

• Closed-end funds: The NAV of this fund is calculated weekly or monthly. 

• Private equity funds: NAV is calculated less frequently, quarterly or annually. This is because it takes a longer time to calculate the value of investments in the company. 

NAV Allotment In Different Types of Mutual Funds

Here is how NAV allotment is done in different types of mutual funds.

• Lump Sum investments: When payment is made through cheque, NAV cannot be alloted on the same day. It will be realised at a later date. Payments made through NEFT, UPI, or Net banking are received instantly by the AMC. If the market dips, and you prefer to buy some units, then it is preferable to use electronic transfers to avoid delays and transfer money to AMC before the cut-off time. 

• SIPs (Systematic Investment Plan): NAV is allotted when the payment is realized in AMC's account, irrespective of the mode of payment. This process relies on the bank settlement system, and automated SIP mandates through which SIP instalments are processed. 

• Other Transaction: The NAV allotment date of any New Fund Offer (NFO) is final, irrespective of when the application has been applied.  For switch transactions (moving money from one fund to another), the NAV of the new fund depends on when the switch-out fund’s payout is processed, as that’s when the switch-in fund receives the money. 

How to Check NAV for Mutual Funds?

Since the market value of securities changes every day, the NAV of a scheme gets updated on a daily basis after the market closes. Therefore, every fund house publishes its NAV daily on its respective website and the AMFI site. You can check a mutual fund's NAV on the fund house's official website or the Association of Mutual Funds in India (AMFI) website. 

Conclusion

NAV in mutual funds represents the per unit price of a mutual fund. It helps investors track fund performance and determine the fund's position in the market. Investors must know that higher NAV funds may not guarantee higher returns. These misconceptions must be clear to all investors before making investment decisions. Learn about NAV funds and investment strategies to make informed decisions.

FAQs

Q. What is a Good NAV for a Mutual Fund?

There’s no good or bad NAV. It reflects the per-unit value of a fund's assets. Focus on fund quality and management, not just NAV.

Q. Is a Higher NAV Better?

No, a higher NAV doesn’t mean better performance. Fund performance depends on portfolio quality, not NAV value.

Q. Can NAV Decrease Over Time?

Yes, NAV can decrease due to falling market value, payouts, or rising expenses.

Q. What Makes NAV Increase?

NAV increases with asset appreciation, income from dividends or interest, and efficient expense management.