NAV in Mutual Funds

What is NAV?

As a new mutual fund investor, a mutual fund's NAV is a crucial value to understand. But, what is the full form of NAV? The NAV full form in mutual funds is Net Asset Value — simply put, it is the unit price of a mutual fund. It is the price at which investors buy (bid price) fund units and sell them (redemption price), from or to a fund company.

While stock prices constantly fluctuate during trading hours, NAVs in mutual funds are determined daily. A mutual fund’s NAV is calculated at the end of the day based on the closing price of all securities owned after making appropriate adjustments. Investment fund expenses, such as fund administration, management, distribution, etc., are charged in proportion to the fund's assets and adjusted in the NAV of the mutual fund.

How is NAV relevant to investors?

NAV only determines the number of mutual fund units allocated to your investment amount. NAV does not reflect the prospects of the fund. It is just the price at which you purchase or redeem the mutual fund units.

While investing in mutual funds, you don't have to worry about how many units you own. You need to identify the rise in the value of your investment. Evaluating the mutual fund NAV is more important than the NAV itself, which means the focus should be on yield rather than NAV.

The NAV of the mutual fund can be considered less significant while investing in a mutual fund. However, your investment decisions should agree with your investment objectives, risk appetite and time horizon to attain your financial goals.

How is NAV calculated? 

●  General Net Asset Value Calculation

Let’s assume you invest Rs 10,000 in a mutual fund with a NAV of Rs 1000. You can purchase 10 units of the mutual fund. 

An asset management company offers two mutual fund schemes A and B. You invest Rs 2 lakh in scheme A and scheme B. The NAV of mutual fund scheme A is Rs 10 and that of mutual fund scheme B is Rs 20.

You have units of the mutual fund allocated as follows: 
●  Scheme A: Rs 2,00,000 / Rs 10 = 20,000 units 
●  Scheme B: Rs 2,00,000 / Rs 20 = 10,000 units

●  Daily NAV Calculation

At the close of the market hours each day, mutual funds compute the market value of their underlying securities. Further, all outstanding liabilities and expenses are deducted to calculate the NAV of the day using the given formula:

Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

Assets of a mutual fund scheme are typically categorized into securities and liquid assets (cash). Securities include equity instruments, debentures, bonds, and other money market instruments.

For example, a mutual fund has Rs. 45 lakh invested in securities and Rs. 5 lakh in cash for total assets of Rs. 50 lakh. The fund has liabilities of Rs. 10 lakh. As a result, the fund would have a total value of Rs. 40 lakh.
 

Mutual Fund NAV vs Stock Prices

The pricing system for NAV in mutual funds significantly differs from that of stock or equities,  issued by companies and listed on a stock exchange. 

Companies issue a limited number of shares through initial public offerings (IPOs) and possibly subsequent follow-on offerings, which are traded on exchanges. Market forces determine stock prices – the supply and demand for stocks. The stock value or pricing system is based solely on market demand.

On the other hand, a mutual fund's value is determined by the amount invested in the fund, its operating costs, and the number of shares outstanding. However, NAV in mutual funds does not represent a fund performance indicator. 

A mutual fund's NAV is relatively insignificant in measuring its performance because the mutual fund returns distribute all of its income and realized capital gains to the fund's shareholders. Instead, mutual funds are best judged by the performance of their underlying securities and their total return, which includes dividends paid.
 

Conclusion

NAV only determines the number of units allocated to your investment. It is insignificant to what the NAV is when you acquired your units. The appreciation of NAV in mutual funds is much more important than NAV. 
 

FAQs

Q1. Is high NAV good or bad?

Ans. A high NAV indicates that the fund holds high asset value. Relative comparisons are important, such as comparing NAV for one investment fund to another. It is also important to compare the fund's NAV to the market price. If the NAV is much higher than the current market price, it could indicate a good buying opportunity.

Q2. Is NAV the same as BV?

Ans. Book value (BV) is used to assess the intrinsic value of a particular firm or company by subtracting the company's liabilities from the assets on the balance sheet. This is a similar calculation to his NAV for an investment fund, but the fund's assets are themselves securities of other companies (in many cases).

Q3. What does NAV mean in Finance?

Ans. The full form of NAV in mutual funds is net asset value. It is a metric used to evaluate the value of a firm or an investment fund by subtracting its liabilities from assets. It can be considered similar to the book value of a company. The NAV calculation is important as it represents how much one share of the fund should be worth.