NAV in Mutual Funds: Meaning, Formula, and Calculation (2024)

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Net Asset Value (NAV) indicates a mutual fund’s scheme performance, reflecting the market value of its securities. Mutual funds invest investors’ money in the securities market, causing the NAV to fluctuate daily with market changes. The NAV per unit is calculated by dividing the market value of securities by the total number of scheme units, determining each unit’s value on any given date. This article explains the meaning of NAV, the formula for calculating it, and other related details.

What is NAV (Net Asset Value)?

The difference between assets and liabilities is called net assets, net worth, or capital for companies and businesses. NAV (Net Asset Value) is used for fund valuation and pricing. A fund’s per-share NAV simplifies pricing for investors, making it easy to value and trade shares. This NAV per share often aligns closely with a business’s book value per share. However, companies with high growth prospects are valued more than their NAV indicates. In closed-end funds, the per-share NAV is often compared to the stock price to identify undervalued or overvalued investments.

Calculation of NAV in Mutual Funds

A mutual fund’s net asset value is calculated as follows:

NAV Calculation Formula

Let’s understand the net asset value calculation with the help of an example. Suppose a mutual fund has a total value of assets worth $10 million and liabilities of $1 million. The fund has 1 million units outstanding. To calculate the net asset value of the fund, we would use the above-mentioned NAV formula for mutual funds:

Net Asset Value = (10 million – 1 million) / 1 million

NAV = 9

Therefore, the fund’s NAV is 9 per unit.

Mutual fund companies calculate the net asset value (NAV) using two primary methods:

Daily NAV Calculation

Mutual fund portfolios are assessed daily, typically after the market closes at 3:30 p.m. The NAV for the next day is based on the closing prices of the securities in the portfolio, adjusted for expenses and liabilities incurred.

General NAV Calculation

Based on the current NAV, this method determines how many mutual fund units an investor receives. For example, if an investor contributes Rs. 15,000 through a Systematic Investment Plan (SIP) and the NAV is Rs. 150, they receive 100 units (Rs. 15,000 / Rs. 150). If the NAV rises to Rs. 180 by the next SIP instalment, the investor receives fewer units, specifically 83.33 units, for the same amount.

Every SIP contribution credits the investor’s account with mutual fund units calculated at the prevailing NAV at the time of investment.

Assets and Liabilities in NAV Calculation

Factors Affecting the NAV Calculation

There are several factors that can affect the mutual fund’s NAV calculation in mutual funds of the net asset value in mutual funds:

• Market Value of the Assets: A mutual fund’s daily NAV is calculated based on the market value of the assets held by the fund. If an asset’s market value increases, the fund’s net asset value increases, and vice versa.
• Expense Ratio: The expense ratio is the fee the mutual fund company charges to manage the fund. The higher the expense ratio, the lower the fund’s net asset value.
• Redemption Fees: Some mutual funds charge redemption fees when investors sell their shares. These fees are deducted from the fund’s net asset value and can reduce the value of an investor’s investment.
• Dividends and Capital Gains: A mutual fund’s net asset value will decrease if it distributes dividends or realises capital gains from selling assets. This is because these payments are deducted from the value of the fund’s assets.
• Sales Charges: When investors buy mutual fund shares, they may have to pay a sales charge, also known as a front-end load. This charge is deducted from the fund’s daily Net Asset Value and reduces the value of an investor’s investment.
• Fund Inflows and Outflows: When investors buy or sell mutual fund shares, they affect the number of assets the fund holds. This can impact the fund’s net asset value, especially if there are large inflows or outflows. If more investors buy shares than sell them, the fund’s assets increase, increasing the net asset value. Conversely, the fund’s assets will decrease if more investors sell shares than buy them. Consequently, the net asset value will go down. Now that we know the NAV meaning in mutual funds, let’s look at the significance of NAV in mutual fund meaning.

Significance of NAV in Mutual Fund Investments

The NAV in a mutual fund is important because it gives investors an idea of its performance. It helps investors track the fund’s growth and returns over time. Additionally, it reflects the fund manager‘s investment strategy and the performance of the underlying assets.

As an Investor, you can use the net asset value to monitor your investments’ performance and make decisions about buying or selling units of the fund. For instance, if a fund’s ‘net asset value’ has consistently increased over time, it may indicate it has been performing well. Hence, consider buying more units. On the other hand, if the ‘net asset value’ has been declining, it may indicate that the fund is not performing well. Consequently, you may consider selling your units.

How is NAV Relevant to Investors?

For several reasons, the Net Asset Value (NAV) is crucial for mutual fund investors.

1. Firstly, it indicates the current value of their investment, offering transparency and enabling fund performance tracking.
2. Secondly, investors purchase and sell mutual fund units at the NAV, which is pivotal in deciding whether to enter or exit a fund.
3. Lastly, analysing a fund’s historical NAV values helps assess its past performance—an increasing NAV reflects growth, whereas a decreasing NAV may signal a tough market climate.

NAV in Closed-End Funds vs Open-Ended Funds

Open-end funds issue unlimited shares and determine their price daily based on NAV at the market close. They are commonly found in mutual funds, including those in 401k plans. On the other hand, closed-end funds trade on exchanges like stocks and may have prices that differ from their NAV.

ETFs trade like stocks, and their prices can fluctuate depending on their NAV. This characteristic allows active traders to capitalise on timely opportunities. ETFs and mutual funds calculate their NAV daily at market close, with ETFs also providing real-time updates throughout the trading day.

Why Should You Consider NAV Before Making Any Investment Decisions?

The ‘net asset value’ is an essential metric that indicates the performance of a mutual fund. Therefore, paying attention to the NAV for mutual funds is crucial before making investment decisions. Here are some reasons why:

• NAV Reflects the Fund’s Performance: A mutual fund’s NAV indicates its performance over a specific period. A higher net asset value indicates a better-performing fund, while a lower net asset value may indicate a poorly performing fund.
• Helps in Comparing Different Funds: Comparing different funds’ performance is essential to making an informed investment decision when investing in mutual funds. The Net Asset Value provides an easy way to compare the performance of different funds.
• Shows the Value of Your Investment: The ‘net asset value’ represents the value of each unit of the mutual fund. Therefore, by multiplying the NAV by the number of units held, you can determine the current value of your investment.
• Affects the Cost of Investment: The ‘net asset value’ affects the cost of investing in a mutual fund. A higher NAV means the cost per unit is higher, while a lower ‘net asset value’ means the cost per unit is lower. Therefore, paying attention to the NAV can help you make an informed decision about the investment cost.

NAV Allotment in Types of Mutual Fund Investments

• Lumpsum Investments: NAV is allotted after the cheque is realised, not on the same day. Payments via RTGS, NEFT, UPI, or instant credit banks are received by the AMC instantly. To benefit from market dips, ensure electronic transfers reach the AMC before the cut-off time.
• Systematic Investment Plans (SIPs): NAV is allotted when the payment is realised in the AMC’s account, regardless of the payment mode. This process relies on banking settlement systems and automated SIP mandates.
• Other Transactions: The NAV of the allotment date is final and depends on the switch-out fund’s payout cycle.
• Long—and Short-Term Investments: Precise NAV isn’t critical for long-term investments. However, small NAV changes can affect returns for short-term investments.

How to Check NAV of Mutual Funds?

You can check mutual fund NAV in various ways:

• Mutual Fund Websites: Most mutual fund companies have websites where you can find the latest NAV of their mutual fund schemes. You can visit the mutual fund company’s website and search for the fund’s latest NAV under the ‘Latest NAV’ section to check today’s net asset value.
• Mutual Fund Screeners: Investors can utilise tools like the Tickertape Mutual Fund Screener to check out the daily NAV of any mutual fund.
• Financial News Websites: Financial news websites provide the latest Net Asset Value in mutual fund schemes. You can search for the fund’s name in the search bar and check its current net asset value.
• AMC’s Mobile App: Mutual fund companies have mobile apps where you can get the latest Net Asset Value of their mutual fund schemes. You can download the app from the respective app store and check the fund’s net asset value by entering its name.
• Fund Fact Sheets: Mutual fund companies publish fund fact sheets monthly or quarterly. They contain important information about the fund, including its latest all MF NAV. You can download the fact sheet from the mutual fund company’s website and check its latest net asset value of mutual funds.

No specific value can be considered a good net asset value for mutual funds, depending on the investment objective, fund category, and investment strategy. Generally, a good NAV is consistent with the investment objectives and aligns with the investor’s risk tolerance, investment horizon, and financial goals.

What is Historic NAV? Should You Consider It Before Making Any Investment Decision?

Historic net asset value refers to the net asset value of a mutual fund scheme over a period of time. It provides insights into how the fund has performed in the past. It can help investors understand the fund’s investment strategy and performance track record.

Yes, an investor should consider mutual fund NAV history before investing. By analysing a mutual fund’s historic ‘net asset value’, you can make informed decisions about whether or not to invest in a particular fund. You can also track your investment performance over time.

However, it’s important to remember that past performance does not indicate future results and that investment decisions should be based on other factors, including historical NAV, but not limited to just that.

Factors Affecting the Net Asset Value

Several factors can impact the ‘net asset value’ of a mutual fund. Here are some of the major factors affecting net asset value:

• Market Volatility and Impact on NAV: Market movements and volatility can impact the value of a mutual fund’s underlying assets. For instance, if the stock market experiences a downturn, even the highest NAV mutual fund may decline.
• Expense Ratio and its Effect on NAV: The expense ratio is the fee the mutual fund company charges for managing the fund. This fee is subtracted from the fund’s assets before calculating the net asset value. Thus, a higher expense ratio can lower the fund’s net asset value.
• Fund Inflows and Outflows Affecting NAV: The inflow and outflow of funds from the mutual fund can impact the Net Asset Value. If there are more redemptions than fresh investments, it can lead to a decline even in the highest NAV mutual fund. Conversely, if there are more fresh investments than redemptions, the ‘net asset value’ can be increased.

To Wrap It Up…

Net asset value (NAV) is crucial when investing in mutual funds. It represents the value of a single fund unit and reflects the fund’s performance over time. By understanding how NAV is calculated and the factors that affect it, you can make informed decisions and achieve your financial goals. So, always keep an eye on NAV and invest wisely!

Frequently Asked Questions About Net Asset Value