What is NAV and the Important Things You Need to Know
Posted on 15-Mar-2024
6 min read
Wondering what is NAV in mutual fund and its significance for investor? Read our blog post to find all information in one place.
Table of Content
Within mutual funds, you'll frequently hear the term 'Net Asset Value' or NAV. It's a concept that might seem complex at first, but it holds immense significance for your investment journey.
This guide will not only explain what NAV in mutual funds is but also delve into why it's a crucial element for you as an investor. We'll explore its role in shaping the performance of mutual funds and how it can be a powerful asset in your investment toolkit.
Net Asset Value (NAV) is a fundamental concept in the world of mutual funds and other types of collective investment schemes. At its core, it represents the per-unit market value of the fund deducting any liabilities. It is the price at which investors buy (enter) and sell (exit) the units of a mutual fund.
Understanding NAV is crucial for any investor engaging with mutual funds because it reflects the real value of their investment at any given point in time.
NAV's relevance for investors extends beyond just being a price tag for mutual fund shares. It's a transparent measure that offers several key insights:
• Investment Tracking: By monitoring the NAV, you can track the value of your investment over time. A rising NAV indicates an increase in the value of the fund's assets or a decrease in its liabilities, whereas a falling NAV suggests the opposite.
• Comparative Analysis: While NAV alone doesn't tell you everything about a fund’s performance, it is a starting point for comparing funds. For example, if two funds have similar investment objectives but vastly different NAV growth rates, it could indicate differences in management effectiveness.
• SIP Investment Decisions: In the context of Systematic Investment Plans (SIPs), NAV helps understand the value received for the amount invested regularly. A lower NAV means more units are purchased and vice versa, affecting the average cost of investment over time.
The NAV is calculated based on the following two methods:
1. Daily NAV Calculation
Mutual funds’ total worth of their portfolio are evaluated daily after the market closes at 3.00 pm. The following day, the market opens with previous day’s closing price. Mutual fund companies accordingly deduct all the liabilities to the get NAV of the fund for the day.
2. General NAV Calculation
Under the general NAV calculation, the total worth of the mutual fund’s portfolio as per the current NAV.
If you want to opt for SIP for Rs. 5,000, and the current NAV is Rs. 10, you are eligible for receiving 500 units (Rs.5,000/Rs.10) of the fund.
On the other hand, when you pay the 2nd instalment of the SIP of Rs. 5,000, if the NAV of the fund increases to Rs. 12, then you shall receive approximately 417 units (Rs. 5,000/Rs. 12).
Therefore, everytime you pay the SIP, your account will be credited with mutual fund units based on the current NAV of the fund.
NAV Calculation Formula:
NAV = (Total Assets - Total Liabilities) / Number of Outstanding Shares
• Performance Indicator: While NAV doesn't account for the cost of entry or exit from a fund, its trend over time can be an indicator of how well the fund's assets are being managed.
• Misinterpretations to Avoid: A common misconception is that a higher NAV equals a better fund, or a lower NAV indicates a cheaper buy. It's crucial to understand that NAV, in isolation, is not a measure of fund quality or performance. It's the change in NAV over time, relative to the fund's investment objectives, that matters.
• Investment Strategy Alignment: For long-term investors, the NAV can be a gauge of how well the fund is aligning with their investment strategy, especially in terms of growth or income generation.
NAV and AUM (Assets Under Management), though both are crucial in understanding mutual funds, they measure different aspects. Here is the difference between NAV and AUM:
Understanding NAV in mutual funds is essential for investors. It serves as a marker of investment performance, aiding in tracking, comparative analysis, and SIP decisions. Calculated daily, NAV reflects the fund's market value per unit. However, it's crucial to avoid misinterpretations; a higher NAV doesn't necessarily imply a better fund. NAV's role extends to aligning investment strategies and assessing fund performance over time, distinct from Assets Under Management.
Q: Can a fund with a lower NAV provide better returns than one with a higher NAV?
Not neccesarily. Here is an example to help you understand it better. Consider two scenarios: one where 200 shares are bought at an NAV of Rs. 50, and another where 100 shares where purchased at an NAV of Rs. 100. Both the funds perform well and witness a 10% increase in the market. Despite the initial NAV difference, both offer the same total investment value of Rs. 11,000. Hence, NAV alone does not impact the fund performance, but, other factors such as fund’s history, popularity and overall market conditions.
Q: When is NAV updated?
NAV is typically updated by 9 pm on a daily basis.
Q: Does a high NAV mean the fund is expensive?
No, NAV alone doesn't determine a fund's expense. It's the percentage change in NAV and the fund's expense ratio that matters more.
Q: How do I find the NAV of a mutual fund?
NAV is calculated by dividing the total value of all assets and cash in a fund's portfolio by the number of shares that are outstanding, after deducting any liabilities.
Q: Should I invest in a mutual fund with a high NAV?
A higher NAV indicates a profit, thus making it better to invest in than a mutual fund with a low NAV.
This guide will not only explain what NAV in mutual funds is but also delve into why it's a crucial element for you as an investor. We'll explore its role in shaping the performance of mutual funds and how it can be a powerful asset in your investment toolkit.
What is NAV in Mutual Funds?
Net Asset Value (NAV) is a fundamental concept in the world of mutual funds and other types of collective investment schemes. At its core, it represents the per-unit market value of the fund deducting any liabilities. It is the price at which investors buy (enter) and sell (exit) the units of a mutual fund.
Understanding NAV is crucial for any investor engaging with mutual funds because it reflects the real value of their investment at any given point in time.
How is the Net Value of an Asset Relevant for Investors?
NAV's relevance for investors extends beyond just being a price tag for mutual fund shares. It's a transparent measure that offers several key insights:
• Investment Tracking: By monitoring the NAV, you can track the value of your investment over time. A rising NAV indicates an increase in the value of the fund's assets or a decrease in its liabilities, whereas a falling NAV suggests the opposite.
• Comparative Analysis: While NAV alone doesn't tell you everything about a fund’s performance, it is a starting point for comparing funds. For example, if two funds have similar investment objectives but vastly different NAV growth rates, it could indicate differences in management effectiveness.
• SIP Investment Decisions: In the context of Systematic Investment Plans (SIPs), NAV helps understand the value received for the amount invested regularly. A lower NAV means more units are purchased and vice versa, affecting the average cost of investment over time.
How is the Net Value of an Asset Calculated?
The NAV is calculated based on the following two methods:
1. Daily NAV Calculation
Mutual funds’ total worth of their portfolio are evaluated daily after the market closes at 3.00 pm. The following day, the market opens with previous day’s closing price. Mutual fund companies accordingly deduct all the liabilities to the get NAV of the fund for the day.
2. General NAV Calculation
Under the general NAV calculation, the total worth of the mutual fund’s portfolio as per the current NAV.
Example of NAV Calulation
If you want to opt for SIP for Rs. 5,000, and the current NAV is Rs. 10, you are eligible for receiving 500 units (Rs.5,000/Rs.10) of the fund.
On the other hand, when you pay the 2nd instalment of the SIP of Rs. 5,000, if the NAV of the fund increases to Rs. 12, then you shall receive approximately 417 units (Rs. 5,000/Rs. 12).
Therefore, everytime you pay the SIP, your account will be credited with mutual fund units based on the current NAV of the fund.
NAV Calculation Formula:
NAV = (Total Assets - Total Liabilities) / Number of Outstanding Shares
Role of NAV in the Performance of a Fund
NAV plays a multifaceted role in assessing a fund's performance:• Performance Indicator: While NAV doesn't account for the cost of entry or exit from a fund, its trend over time can be an indicator of how well the fund's assets are being managed.
• Misinterpretations to Avoid: A common misconception is that a higher NAV equals a better fund, or a lower NAV indicates a cheaper buy. It's crucial to understand that NAV, in isolation, is not a measure of fund quality or performance. It's the change in NAV over time, relative to the fund's investment objectives, that matters.
• Investment Strategy Alignment: For long-term investors, the NAV can be a gauge of how well the fund is aligning with their investment strategy, especially in terms of growth or income generation.
Difference Between NAV and AUM
NAV and AUM (Assets Under Management), though both are crucial in understanding mutual funds, they measure different aspects. Here is the difference between NAV and AUM:
| Parameters | NAV | AUM |
| Definition | Per unit cost of a mutual fund | Total assets under a mutual fund, including all assets invested by the mutual fund as well as cash held by it |
| Calculation | Total assets minus liabilities | All assets of all funds, including cash and securities |
| Refers to | Individual fund | Asset manager as a whole |
| Offers insight about the | Share price after liquidation | Size of the asset manager, the performance gains, the trust of its investors, and experience |
| Changes | Calculated at the end of trading (3.00 pm) | Fluctuates all day |
Conclusion
Understanding NAV in mutual funds is essential for investors. It serves as a marker of investment performance, aiding in tracking, comparative analysis, and SIP decisions. Calculated daily, NAV reflects the fund's market value per unit. However, it's crucial to avoid misinterpretations; a higher NAV doesn't necessarily imply a better fund. NAV's role extends to aligning investment strategies and assessing fund performance over time, distinct from Assets Under Management.
FAQs
Here are some of the frequently asked questions about NAV:Q: Can a fund with a lower NAV provide better returns than one with a higher NAV?
Not neccesarily. Here is an example to help you understand it better. Consider two scenarios: one where 200 shares are bought at an NAV of Rs. 50, and another where 100 shares where purchased at an NAV of Rs. 100. Both the funds perform well and witness a 10% increase in the market. Despite the initial NAV difference, both offer the same total investment value of Rs. 11,000. Hence, NAV alone does not impact the fund performance, but, other factors such as fund’s history, popularity and overall market conditions.
Q: When is NAV updated?
NAV is typically updated by 9 pm on a daily basis.
Q: Does a high NAV mean the fund is expensive?
No, NAV alone doesn't determine a fund's expense. It's the percentage change in NAV and the fund's expense ratio that matters more.
Q: How do I find the NAV of a mutual fund?
NAV is calculated by dividing the total value of all assets and cash in a fund's portfolio by the number of shares that are outstanding, after deducting any liabilities.
Q: Should I invest in a mutual fund with a high NAV?
A higher NAV indicates a profit, thus making it better to invest in than a mutual fund with a low NAV.
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