Investing in mutual funds is one of the most popular ways for Indians to grow their wealth over time. However, many investors have difficulty understanding the key terms associated with mutual funds. One such key term is Net Asset Value (NAV), and understanding NAV is essential to making informed investment decisions. In this blog, we explain what NAV is, how it is calculated, and its role in mutual fund investing.
What is Mutual Fund Net Asset Value?
Net Asset Value (NAV) is the price per share of a mutual fund. It is the market value of all the securities the fund holds, minus its liabilities, divided by the total number of shares issued to investors.
NAV is similar to the price of a stock on a stock exchange, but with one key difference: While stock prices change constantly during market hours, a mutual fund’s NAV is calculated only once at the end of each trading day.
How is NAV calculated?
Mutual funds invest in many different types of securities, such as stocks, bonds, and other assets. The total value of these assets is called the fund’s total assets. However, mutual funds also have expenses and liabilities, such as management fees and operating costs, that must also be deducted. The remaining costs are divided by the number of units to arrive at the net asset value. For example:
If the total assets of a mutual fund are Rs 500 crore
And the total liabilities amount to Rs 5,000 crore
And 100 billion units have been issued
In this case, the net asset value per unit will be:
This means that if an investor wants to buy a unit of this mutual fund, he will have to pay Rs 45 (excluding participation fee, if any).
Does it matter if the net asset value is high or low?
Many investors believe that a mutual fund with a lower NAV is cheaper and hence better, while others think a higher NAV means better performance. However, NAV alone does not determine whether a mutual fund is good or bad. For example:
Fund A has a NAV of ₹10 and has provided a return of 15% for the year.
Fund B has a NAV of ₹50 but has also provided a return of 15%.
Even though Fund B has a higher NAV, both funds have performed the same in terms of returns. Hence, NAV should not be the only factor in selecting a mutual fund.
NAV and Mutual Fund Transactions
NAV plays a crucial role in buying and selling mutual fund units:
Buying Mutual Funds: When you invest in a mutual fund, you buy units at the NAV declared for the day. If you invest ₹10,000 in a fund with an NAV of ₹50, you will receive 200 units.
Selling Mutual Funds: When you sell mutual fund units, the redemption price is based on the day’s net asset value. If the net asset value increases, you make a profit; if it decreases, you incur a loss.
Types of NAV in Mutual Funds
Daily NAV: This is the NAV calculated and published every business day.
Indicative NAV (iNAV): Some exchange-traded funds (ETFs) provide an intraday indicative NAV, which changes during market hours.
Final Net Asset Value: This is the official net asset value announced after the market closes and all transactions have been completed.
Factors Affecting Net Asset Value
The net asset value fluctuates for several reasons:
Market Movements: Since mutual funds invest in stocks and bonds, changes in stock prices and interest rates affect the net asset value.
Dividend Payments: When a fund pays a dividend, its net asset value is reduced by the amount of the dividend.
Expense Ratio: A higher expense ratio reduces net asset value over time because expenses are subtracted from total assets.
New Investments and Redemptions: As many investors purchase or redeem shares, the fund’s investment activity may cause the net asset value to fluctuate slightly.
How do I find the NAV?
You can check the NAV of any mutual fund through:
The official website of AMFI (Association of Mutual Funds in India): www.amfiindia.com
Mutual fund company websites
Financial news websites and investment apps
Conclusion
Understanding NAV is crucial for mutual fund investors, but it should not be the only factor in selecting a fund. Instead, investors should focus on past performance, fund management quality, investment strategy, and expense ratio. Making informed decisions can help investors maximize their profits and achieve their financial goals.
FAQs (FREQUENTLY ASKED QUESTIONS)
- Is a higher NAV better than a lower NAV? No, a higher or lower NAV does not indicate the performance of a mutual fund. Returns depend on the fund’s investment strategy and portfolio performance.
- When is NAV updated? NAV is updated at the end of each trading day after market closure.
- How does NAV impact my returns? NAV determines the price at which you buy or sell mutual fund units, but your returns depend on the fund’s growth and performance over time.
