There are different terminologies (read jargons) associated with mutual fund investing. And, one such term is Net Asset Value or NAV.
Is it something that every mutual fund investor should be aware of?
Yes.
In this article, we will introduce NAV and why investors like you should be aware of it.
If we look at direct stock investing, then you might be aware that every share of a company has a specific share price. Just like that, in the world of mutual funds, we have NAV which is the price of one unit of a mutual fund whether it is equity, debt or hybrid mutual fund.
But is NAV just like a company’s share price?
Not really.
While the share prices of stocks keep fluctuating due to the investor sentiment, NAV is calculated by considering the value of all the assets after subtracting the liabilities, divided by the number of units outstanding.
But, the value of the underlying investment instruments such as stocks or bonds will vary as per the current prices of its underlying securities which in turn influences the fund’s NAV.
The formula to calculate NAV is:
NAV = (Current value of assets - liabilities) / Number of outstanding units
Where,
Current value of assets: The current value of all underlying assets such as stock, bonds and other financial instruments in a scheme.
Liabilities: These include expenses like fund management fees and other operational costs.
Number of outstanding Units: The total number of units issued by the mutual fund.
For example, If you invest ₹10,000 in a fund with an NAV of ₹50, you will receive 200 units (₹10,000/₹50). If the NAV increases to ₹55, your investment becomes ₹11,000.
Mutual fund NAV is calculated at the end of each trading day based on the closing prices of securities held in the portfolio.
We have seen how mutual fund houses calculate the fund’s NAV, now let us look into some of the important aspects of NAV that you need to keep in mind.
The mutual fund’s NAV simply represents the value of a single unit of a mutual fund. The value of your investment depends on the units that you hold multiplied by the current NAV.
The concept of NAV as the value of a single unit of a scheme makes it clear that when an investor invests in a mutual fund, he or she is getting units against their investment. So, irrespective of the changes in their investment value, the units held by you remain fixed.
For example, if the current value of your investment is Rs 1 lakh and you hold 1000 units of the fund, then even when the markets take a downward turn, you will still hold 1000 units if you don’t redeem your investments.
The NAV of a mutual fund changes daily due to market value shifts in the underlying securities. When the market value of these securities goes up, the NAV increases. When it drops, the NAV decreases. These daily changes affect the total value of an investor's investment in the fund.
Investors need to understand that these daily movements are normal in mutual fund investing. However, over the long term, well-managed mutual funds usually grow, reflecting the market's overall rise.
Lower NAV is cheaper or a better investment
The NAV of a mutual fund does not forecast future performance. For example, a fund with an NAV of ₹10 can give the same returns as one with ₹100.
A new fund with low NAV is a good investment option
Many believe that a new fund having a lower NAV is good as it is less expensive. However, the performance of a fund relies on the quality of the portfolio and not NAV.
NAV impacts Mutual Fund Performance
The performance of a mutual fund depends on the underlying securities, not the NAV. A mutual fund with a ₹20 NAV may perform better than another with a ₹200 NAV through strategy.
Increased NAV means overvalued Mutual Fund
NAV reflects the per-unit price but not whether a fund is overvalued. Look instead at historic returns, expense ratios, and how the fund has performed during severe market fluctuation.
NAV helps in comparing two different funds
NAV doesn’t help in comparing funds as NAV only represents the value of a single unit. For example, a higher NAV equity fund isn't necessarily a better choice than a lower NAV equity fund.
NAV is an important aspect of mutual fund investing. However, it should be noted that NAV should not be considered as the base for investment choices. Investors should consider the fund’s performance, expense ratio, and portfolio quality.
NAV helps with pricing purchases and redemptions but does not affect future returns. By clearing up common myths about NAV, investors can understand this term better.
