What is Mutual Fund NAV and How is it calculated?

Have you ever come across the term “NAV” while exploring Mutual Funds? If you are curious about what it means and how it’s calculated, here is the answer. Let’s demystify Net Asset Value (NAV) and its significance in the world of Mutual Fund investments. We will also discuss how investors can leverage NAV to make informed decisions. So, let’s dive in!

What is NAV?

NAV stands for Net Asset Value, which represents net value of a particular Mutual Fund scheme. In simpler terms, NAV is calculated by subtracting a scheme’s liabilities from its assets and dividing the result by the number of units outstanding. It serves as the price at which Mutual Fund (MF) scheme units are bought and redeemed. For calculating NAV, here is a conceptual formula:

• NAV - Net Asset Value per unit
• Investments - Market value of a particular scheme’s assets (bonds, equities, others) as of closing price for the day
• Income - Accrued (i.e., earned but not received) interest and dividends
• Receivables - Money to be received on sale of investments
• Expenses - Fund management charges, custodian costs, accrued but not paid
• Payables - Money to be paid for buying assets (bonds, equities, others)

The role of NAV in investment process:

When investors invests in a Mutual Fund scheme, the units that they will acquire shall be required to be determined. This is where NAV comes into play. The number of units allotted to an investor is calculated by dividing the investment amount by the NAV. For example, if an investor invests ₹1,50,000 in a Mutual Fund scheme with a NAV of ₹15, they will be allotted 10,000 units.

Asset Management Companies (AMCs) calculate and publish the NAVs of all Mutual Fund schemes, at the end of every business day. The time lines for disclosures for Fund of Funds schemes differ from AMC to AMC. Since the market values of underlying investments change daily, NAV prices are determined based on the closing market prices of securities. It is worth noting that generally new Mutual Fund schemes are launched with a NAV of ₹10 per unit. As the market value of the underlying investments fluctuates, NAV values changes proportionately.

Analysing Scheme Performance using NAV:

To evaluate the performance of a Mutual Fund scheme, investors compare the NAV at the start and end dates for a specific time period. The absolute value of the NAV doesn’t affect the scheme’s future performance.

Let’s consider a scenario where Scheme A, which has a NAV of 100, has a track record of 10 years, while Scheme B, a recently launched scheme, has a NAV of 10. Let’s compare the performance for schemes A and B:

Although their starting NAVs differ significantly, both schemes deliver identical returns. This demonstrates that NAV signifies the price at which an investor can buy or sell units in a Mutual Fund scheme. In the given example above, Scheme A’s NAV increased from ₹100 to ₹110, generating a 10% return, while Scheme B’s NAV too generated a 10% return as the NAV increased from ₹10 to ₹11.

How can investors utilize NAV for Investment Decision?

1. Gauging Investment Amount

   Investors can use NAV to determine the number of units they will receive for a specific investment amount. This helps in diversifying investments across different schemes. For example, if an investor has ₹1,00,000 and wants to invest across two schemes, NAV will help them in deciding the allocation for each scheme.

2. Redeeming Mutual Fund Units

   When redeeming units of a Mutual Fund scheme, the prevailing NAV is crucial. It helps investor calculate the value they will receive upon redemption. For instance, if an investor wants to redeem ₹1000 rupees then they can divide this amount by the current NAV to get an idea on the number of units they need to redeem. NAV can also be used for portfolio rebalancing as the NAV increases/decreases compared to its inception.

3. Analysing Scheme’s Performance (anchoring)

   Comparing NAVs of a Mutual Fund scheme at different time periods enable investors to evaluate its performance. For example, if a scheme had a NAV of ₹10 at its inception and after 5 years its NAV has increased to ₹50, investors can assess the fund’s performance over the years.

Conclusion:

While NAV is a useful metric in the realm of Mutual Fund investments, investors should not rely solely on NAV when making investment decisions. For instance, comparing just the NAV for two Mutual Fund schemes for selecting a scheme is not a useful comparison. Instead, investors should consider other factors which include, the fund’s investment strategy, historical performance, expense ratio, and risk profile. It is always advisable to seek professional advice before making any investment decision.

The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.