All About Mutual Funds NAV

It is important to understand the concept of Net Asset Value (NAV) while investing your money in mutual funds,. The NAV is the value per unit of the scheme on a specific day. It is the price at which you can sell or purchase the fund after adjusting for entry or exit loads if any.

NAV Concept

The general formula to calculate NAV of a mutual fund scheme is as follows:

 NAV formula equals to = (Assets - Debts) / (Number of outstanding units)

For example, a mutual fund scheme A has got an investment of Rs 10 lakh, based on the day's closing prices for each asset. On the other hand, the fund has Rs 2 lakh in short-term liabilities. The fund has 50,000 unit outstanding. The NAV is calculated as:

NAV = (Rs 10,00,000 - Rs 2,00,000) / 50,000 => Rs 8,00,000 / 50,000 = Rs 16

Similarly, another mutual fund scheme B which has got an investment of Rs 15 lakh, based on the day's closing prices for each asset. And on the other hand, the fund has Rs 4 lakh in short-term liabilities. The fund has 80,000 units outstanding. The NAV is calculated as:

NAV = (Rs 15,00,000 - Rs 4,00,000) / 80,000 => Rs 11,00,000 / 80,000 = Rs 13.75

However, in reality, the asset and liabilities may be more to define the NAV of a scheme such as cash equivalents, accrued income and operating expenses, management expenses, distribution, and marketing expenses, etc, respectively. However, the basic concept remains the same.

It shows that NAV simply means that asset - minus liabilities which is averaged out by a number of outstanding units which further means that doing a comparison of NAV of any two mutual funds will not justify the pros and cons of the scheme. However, a higher NAV scheme can be considered as a scheme which has got a decent investment from investors and has done fairly well over a period of time.

What does lower or higher NAV mean?

Often investors have been confused that a lower NAV fund is cheaper than a higher NAV fund. In reality, a lower or higher NAV shouldn’t make any difference to your investment decision. The decision to pick a fund should be based on the suitability of the fund in your portfolio, fund strategy and the pedigree of the investment manager and team managing the strategy

Let us understand it with an example:

If you had to invest Rs 10,000 in either of the two funds – Fund A (NAV -10), Fund B (NAV - 125), the number of units you would receive would be different – 1000 and 80 respectively, but the value of your investment is Rs 10,000 in both. If both funds hold exactly the same portfolio then a 10% movement in underlying stocks will result in NAV and hence the investment value increasing by 10% for both funds.

Fund A : NAV – 11.00, - Investment Value : Rs 11,000

Fund B : NAV- 137.5, - Investment Value: Rs 11,000

Thus, the NAV level should not make any implications on the decision of buying mutual funds. The growth of NAV would depend on the underlying assets. An investor should choose a fund that is performing well, even if the NAV is high. A high NAV actually means the fund has been performing well.