Table of content

Net Asset Value in Mutual Funds

Table of content

What is Net Asset Value (NAV) in Mutual Funds?

NAV is the acronym for Net Asset Value, and it represents the net value of an entity. In the case of mutual funds, NAV means the market value per unit of the fund. NAV of a mutual fund scheme is derived basis the difference between total assets and total liabilities divided by the total number of outstanding units.

A mutual fund NAV represents the per share or unit price of a mutual fund scheme on a specific date or time. Usually, the NAV of a new mutual fund (NFO) scheme begins at Rs. 10 and gradually increases as the assets under management grows. All mutual fund schemes including open-ended, closed-ended, and interval schemes across equity, debt and hybrid categories have NAVs which are driven by market movements.

Calculation of Net Asset Value

The formula used for the calculation of Net Asset Value is:

Net Asset Value = (Total Assets - Total Liabilities) / Total Number of Outstanding Shares

The assets of a mutual fund scheme include its investments, which can be equity shares, preference shares etc. in case of equity mutual funds or debentures, bonds, government securities in case of debt mutual funds and cash holdings. The liabilities include fund manager fees, accrued expenses and payments.

Mutual Funds are not traded in real-time. Considering the various assets and liabilities, the NAV of Mutual Funds is calculated based on the trading method. Let us check out what these assets and liabilities are.

  • Assets under Mutual Funds

    Assets under Mutual Funds include the total market value of the fund’s

    1. Investments
    2. Receivables
    3. Cash and cash equivalents
    4. Accrued income

    Based on the closing price of the various securities, the market value of these assets is calculated at the end of the day. The total sum of all these assets and their variants together constitutes assets.

  • Liabilities under Mutual Funds

    Liabilities under Mutual Funds include:

    1. Money owed to the lenders
    2. Outstanding payments
    3. Fees and charges owed to associated entities
    4. Foreign liabilities, if any
    5. Accrued expenses

    The foreign liabilities include shares of NRIs, sale proceeds pending repatriation, and income or dividends for which payments are pending to non-residents. Staff salaries, operating expenses, management expenses, distribution, etc., falls under the accrued expenses category.

Importance of NAV for Investors

Investors consider the NAV and price of an equity share the same. But there are differences in calculation. In the case of calculation of the price of equity shares, only the liquid assets of the company are included. Whereas when NAV is calculated, both liquid and non-liquid assets are considered. While the total equity represents a company’s working capital, NAV depicts a company’s total monetary worth.

Calculation of NAV

NAV can be calculated in two ways. They are:

  • Daily Valuation

    Every day, once the stock market closes at 3:30 pm, all the mutual fund investment companies evaluate the total worth of their investment portfolio. On the next day, the market reopens with the previous day’s closing price. Using the formula mentioned above, the fund houses calculate NAV after deducting all the expenses.

  • General Calculation

    The general NAV is the price of the equity share and the total cost of the individual shares. The general calculation gives the market value of an asset and is subject to market movement.

How Net Asset Value Affects the Performance of a Fund?

Investors generally believe that lower NAV means the scheme is cheaper and better. But this is not the correct way to judge mutual fund schemes. A fund with a lower NAV may not always be the best investment.

For example, consider two funds, Fund A and Fund B with NAV of Rs. 10 and Rs. 100 respectively. After a year, the NAV of both funds grows by 10%. So, the NAV for Fund A becomes Rs. 11 while the NAV of Fund B grows to Rs. 110. As you can see, a 10% growth in NAVs of both the funds reflects in the same manner, irrespective of the base NAV. So, the NAV doesn’t really matter. What matters is the performance of the fund, which depends upon its underlying stocks and investments.

So, while a rising and falling NAV can help you judge the short-term performance of a fund, you should instead focus on long-term performance parameters like stock selection, Sharpe ratio, Standard Deviation, etc.

Frequently Asked Questions

NAV represents the per unit price of a mutual fund scheme on a specific date or time, whereas AUM refers to the total value of assets managed by the scheme.

Net Asset Value depicts how the assets have performed in the previous year. It does not matter how high or low NAV is. Hence, NAV shouldn’t be the best parameter to use while deciding which funds to invest in.

If your current NAV is greater than your purchase NAV, then it simply means that the fund’s NAV has grown in the specific period. NAV has an impact only on the number of units you may receive. If you select a scheme with high Net Asset Value, the number of units you will get will be less. However, your investment’s value will remain the same.

NAV decreases when the market value of the underlying stocks in a mutual fund’s portfolio falls. The NAV of a fund can also decrease when a dividend is declared.

The factors affecting the Net Asset Value are:

  • Type of the mutual fund
  • Fund expenses
  • Profits earned from the investment
  • Losses booked from the investment
  • Dividend pay-outs.
  • Exit or entry of the investor.

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