Have you ever browsed through mutual fund details and come across the term NAV? If so, do you know what it means? The NAV full form of Net Asset Value, represents the true worth of an investment, calculated by subtracting liabilities from total assets.
More than just a number, NAV serves as a real-time indicator of a fund’s financial health. Fund houses update it daily to reflect market fluctuations, helping investors track performance accurately.
Whether you are an experienced investor or new to the game, understanding the concept of NAV is essential for smart decision-making. In this blog, we will break down its meaning, and calculation method to see how it can impact your investment strategy.
Understanding Net Asset Value (NAV)
NAV, or Net Asset Value, refers to the market value per unit of a mutual fund. To determine it, you have to subtract the fund’s liabilities from its total asset value and then divide the result by the number of outstanding units.
To calculate the price of each fund unit, you must calculate the market value of the portfolio and divide it by the total number of current fund units. Mutual fund units can start at ₹10, with NAV increasing as the fund’s assets grow over time.
While NAV reflects the fund’s performance, a higher NAV does not necessarily mean a better investment. Instead, it indicates that the fund has been operational for a longer period or has accumulated significant assets.
What is NAV in Mutual Funds?
If you are new to mutual fund investing, you may think what is NAV in mutual funds and how it works?
Unlike stock prices, which fluctuate throughout trading hours, NAV is calculated just once a day. Mutual fund houses determine the NAV at the end of each trading day based on the closing prices of all securities held in the fund’s portfolio, making necessary adjustments for expenses and liabilities. This ensures that investors get an accurate and updated valuation of their fund holdings daily.
A mutual fund scheme incurs various expenses, collectively known as the Total Expense Ratio (TER), which includes costs for fund management, administration, and distribution. These expenses are proportionally deducted from the scheme’s assets, and the impact is reflected in the Net Asset Value (NAV). A higher TER can slightly reduce returns, making it essential for investors to consider when evaluating mutual fund performance.
What is the Role of NAV in Mutual Funds?
NAV in MF can be used to analyse the past performance of a mutual fund scheme. However, NAV itself does not influence your returns. A high or low NAV does not necessarily result in higher or lower returns. By tracking the rise or fall of a fund’s NAV over time, you can identify its growth trends and make more informed investment decisions.
For instance, if a fund’s NAV increased from ₹10 five years ago to ₹150 today, it may indicate an increase in Assets Under Management (AUM), suggesting that more investors have contributed to the fund and trust its fund manager. Since NAV fluctuates daily, the timing of your investments and redemptions plays a crucial role in maximising returns.
Relation Between Investment Timing and NAV
The Securities and Exchange Board of India (SEBI) has established a cut-off time for different types of mutual fund schemes. To receive the NAV on the same day, you must have to place an order before the cut-off time. The Indian mutual fund industry now follows the realisation-based NAV system. Let’s break it down:
When you buy or sell mutual fund units, there are two key steps:
- Placing the request and paying money from your bank account.
- The money reaches the fund house’s collection account.
The fund house will allocate you the NAV of the day when it receives the money, not the day you placed the request. Even if you initiate the payment before the cut-off time, the NAV applicable to your investment will be determined by when the money is credited to the fund’s account. This makes it important to consider processing times when planning your investments.
Calculation of NAV in Mutual Funds
There are two main methods for calculating Net Asset Value (NAV):
1. General NAV Calculation
This is a common method of how is NAV calculated. The fund house allocates mutual fund units based on the current NAV.
For example, if you invest ₹10,000 through a Systematic Investment Plan (SIP) and the NAV at that time is ₹100, you will receive 100 units (₹10,000 ÷ ₹100) of the fund.
If the NAV rises to ₹120 by your next SIP instalment, you will receive fewer units—around 83 units. Each SIP contribution adds mutual fund units to your account according to the NAV on that specific purchase date.
2. Daily NAV Calculation
Mutual fund companies assess the total portfolio value daily, typically after the stock market closes at 3:30 PM. This valuation helps determine the Net Asset Value (NAV), which is updated once a day based on the closing prices of the securities held in the fund.
The following day, the market reopens using the previous day’s closing price, and the NAV is recalculated by deducting relevant expenses and liabilities based on this updated valuation.
Final Thoughts
NAV or Net Asset Value serves as a clear indicator of transparency, representing the true value of an investment. If you are a new investor or experienced investor in mutual funds, understanding NAV is essential for making well-informed decisions.
To invest in mutual funds, there are two options– direct and regular mutual funds. If you want to get the maximum from your MF investment, you should always go with direct funds.
At Torus Digital, we provide direct mutual funds to help you maximise your returns. Open a Demat account today with zero account opening fees and no AMC charges, making investing more affordable and hassle-free. Start your investment journey now!
