Understanding NAV: The True Value of Your Mutual Fund Investment
When you invest in mutual funds, youโre hearing about terms like Expense Ratio, Exit Load, and most importantly NAV. Many investors focus on returns; the Net Asset Value (NAV) is the foundational metric that tells you the true market value of your fundโs assets and determines how many units your own.
We can say that it is the heartbeat of the scheme that reflects the cumulative performance of all the stocks, bonds, and assets held by the fund manager. Understanding what is NAV of a mutual fund is an unavoidable part of making informed investment decisions.
If you want to move beyond simply tracking returns and grasp the underlying mechanics of your investment, this guide will provide a definitive explanation of NAV in mutual fund schemes.
What is NAV?
The NAV full form in mutual fund is Net Asset Value. The NAV definition mutual fund is simple; it is the market value per unit of a mutual fund scheme. It represents the value of a single unit of ownership in the fundโs assets.
In more simple words to understand what is NAV, imagine a mutual fund is a large pie. The pie is made up of all the investments the fund holds, like stocks, bonds, etc. The total worth of this pie is called the total asset value; when the pie is divided into small, the value of each piece is the NAV.
NAV Calculation: How is it Determined?
The calculation for the NAV value of mutual fund is straightforward, and that is performed by the fund house every business day after the market closes. Letโs see how they calculate NAV in detail;
NAV per Unit = (Market Value of Assets โ Liabilities) * Total Number of Outstanding Units
Components Explained;
Market Value of Assets: It includes the current market value of all the securities like stocks, bonds, and commodities that a fund holds.
Liabilities: It includes all the expenses the fund owes, like the daily portion of the Expense Ratio, custodian fees, and administrative costs.
Total Outstanding Units: It is the total number of units held by all investors in the scheme.
Letโs see an example;
Suppose a fund has โน100 crore worth of stocks and bonds, โน5 crore in liabilities, and 95 lakh outstanding units.
Calculate NAV;
First apply the formula:
NAV = (โน100,00,00,000 – โน5,00,00,000) * 95,00,000 units
NAV = โน95,00,00,000 * 95,00,000 units = โน100.00 per unit
The NAV value of that scheme is โน100.00.
Why NAV is NOT Like a Stock Price?
The NAV in mutual fund schemes is calculated daily based on the current market prices, and it is completely different from a stock price. Some of the differentiating features are given below;
| Features | NAV (Net Asset Value) | Stock Price |
|---|---|---|
| Calculation | Once a day (after market close) | Continuously throughout the trading day |
| What it Represents | Value of an undivided fraction of the entire portfolio | Value of an ownership share in a single company |
| Liquidity | Low (Redeemed directly from the AMC, not instantly tradable) | High (Traded instantly on the stock exchange). |
| Trading Mechanism | Not traded on an exchange | Traded continuously on a stock exchange |
| Frequency of Change | Once per day (after market) | Second-by-second (market hours) |
| Impact of Trade | Buying or selling units generally does not affect the NAV | Buying or selling large volumes directly affects the price |
| Goal for Investors | Focus is on the percentage change in NAV (returns) over time. | Focus is on the price appreciation of the individual share. |
Why Does the NAV Value Change Daily?
The NAV values constantly fluctuated because of the daily movements of the financial markets. If a stock that is held by an equity mutual fund raises the value during the trading day, that will increase the market value of the assets and push the NAV in mutual fund schemes up. Conversely, if the stock prices fall, the NAV decreases.
Like this, the fundโs daily expenses (liabilities) also affect the NAV. This small and continuous deduction will decrease NAV, which is why your returns are calculated after the expense ratio is factored in. When a new investor buys units, that also make changes on the total number of outstanding units. However, because these transactions are processed at the current NAV, the inflow/outflow generally does not change the NAV itself; it only changes the denominator of the formula.
Conclusion
Understanding the NAV in mutual fund and the underlying meaning of NAV in mutual fund schemes elevates your investment knowledge. NAV reflects the per-unit value of your investment on a given day and is one of the key metrics used to understand fund valuation. Instead of focusing solely on choosing a scheme based on NAV, investors generally evaluate two broader aspects;ย
๐ธ Fund Quality: The consistency and track record of the fund manager in growing the asset value.
๐ธ Percentage Growth: The rate at which the NAV value increases over your investment horizon.
Monitoring NAV movements and understanding the underlying factors helps investors gain better visibility into how their mutual fund holdings are valued. So, ensure your investments decisions are guided by true market value, not just speculation.ย
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Frequently Asked Questions
What does NAV mean?ย
NAV stands for Net Asset Value. It is the total market value of a mutual fund’s assets (stocks, bonds, cash, etc.), minus its liabilities (expenses and fees), divided by the total number of outstanding units. ย
What is good NAV in mutual fund?ย
There is no such thing as a “good” or “bad” NAV value itself. NAV is merely a numerical representation of the unit price.ย
Is high NAV good or bad?ย
High NAV is neither inherently good nor bad; it is simply historical.ย
โ A High NAV often indicates that the fund has performed well over a long period, accumulating high asset value.ย
โ A fund with a high NAV has the same growth potential as a fund with a low NAV, provided both hold identical underlying assets and have the same expense ratio.ย
Investors should focus on the fund’s track record and future growth potential (returns), not the current NAV value.ย
What if NAV is low?ย
If the NAV is low, it simply means that the fund is either newly launched or has experienced poor performance (losses) since its inception.ย
A low NAV allows your initial investment to buy more units compared to a high NAV fund. However, your percentage return will be exactly the same as the high NAV fund if both portfolios grow at the same rate.
Can a mutual fund NAV go to zero?ย
Theoretically, yes, a mutual fund NAV can go to zero, but it is extremely rare and highly unlikely. For the NAV to reach zero, all the fund’s underlying assets (stocks, bonds, cash) would have to become completely worthless, and the fund’s liabilities would have to exceed its negligible cash reserves. ย
What are the disadvantages of NAV?ย
The NAV itself does not have disadvantages, but relying on it incorrectly can lead to poor investor decisions:ย
โจ Misleading Perception: Investors often mistakenly believe that a low NAV is “cheap” or offers a “discount,” leading to a poor selection of decisions.ย
โจ Delayed Calculation: NAV is calculated only once daily after the market closes. This means investors cannot track the precise value of their investment in real-time during trading hours.ย
โจ Doesn’t Reflect Fees: The published NAV reflects the net value after the daily portion of the expense ratio is deducted, but it does not account for other costs like the Exit Load, which are applied only upon redemption.
DISCLAIMER: Investment in securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Full disclaimer: https://bit.ly/naviadisclaimer.
