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Mutual fund NAV

Mutual fund NAV - Meaning, Calculation, Common Myths & Relation with SIP

NAV stands for “Net Asset Value”. It represents the fund’s per-unit market value on a particular day. It is calculated by dividing the market value of all underlying securities by the total number of units on a given day. Since the underlying securities are highly dynamic and change every second, the NAV of a mutual fund also changes daily. Similar to a security's price, a mutual fund's NAV is subject to market fluctuations. Factors such as changes in the market value of underlying securities and variations in expenses can impact the NAV.

Net Asset Value (NAV) Formula

NAV = (Market value of assets - liabilities) / Number of outstanding units, where, 

  • Market value of assets - The current value of all the underlying assets, such as stocks, bonds, and other financial instruments. (Current value of investments held + income accrued + current assets)
  • Liabilities - Includes debt and payment obligations such as operating expenses and other fees. (Current liabilities + accrued expenses)
  • Income accrued is the dividend declared but not received. Expenses accrued include fees payable.
  • Number of outstanding Units - Refers to the total number of units issued by the mutual fund. 

NAV is calculated every day, and it is mandatory to publish it on the respective mutual fund’s website as well as AMFI’s website every working day.

Calculating Mutual Fund NAV

When it comes to mutual funds, a multitude of expenses come into play. The expense ratio, crucial in the NAV calculation, constitutes the summation of all annual expenses incurred by the mutual fund scheme. This ratio is inclusive of management charges, operating costs, as well as distribution and marketing expenses. Essentially, the expense ratio provides a consolidated view of the operational and managerial costs associated with the mutual fund, contributing to the determination of its net asset value.

Relevance of Mutual Fund NAV

  • Number of units investors will get - NAV is the price at which investors buy and sell Units from a fund house. The NAV of a mutual fund determines the number of mutual fund units an investor can obtain by investing a certain amount in mutual funds. For instance, if the NAV of a mutual fund is Rs 50, and the investor wants to invest Rs 1,00,000, then he will obtain 2000 mutual fund units (Rs. 1,00,000/Rs. 50). 
  • Past performance calculation - The performance of a mutual fund scheme is denoted by its NAV per unit. To calculate any kind of past returns of a mutual fund, whether in the form of absolute, CAGR, or rolling returns, NAV is of utmost importance. Without having the data of NAV, the returns of a mutual fund cannot be calculated.

Mutual Fund NAV Myths

  • Higher NAV is expensive; lower NAV is attractive - Investors often assume that a high NAV means a fund is expensive and a low NAV is more valuable. Let's look at this with the help of an example. For instance, there are two identical funds with the same portfolio holding; one has been around for a while, and the other is a new fund. In numerical terms, the NAV of the first fund is, say, Rs 100, and the new fund’s NAV is Rs 10. You invested Rs 1,00,000 in both schemes, meaning you obtained 1000 units of the former and 10000 units of the latter. A year later, both the funds grew by the same percentage, say 10%. If the prices are now Rs 110 and Rs 11, it doesn’t mean that the former has performed better; rather, it means there is a 10% growth in both funds and the value of your investment in both will amount to Rs 1,10,000. 
  • Funds with a higher NAV have performed better - A higher NAV doesn’t necessarily indicate better performance. It is essential to recognise that a scheme's NAV is simply a reflection of the market worth of the underlying shares in the fund on any given day. The fund that was launched in the past will typically have a higher Net Asset Value (NAV), even if it may underperform compared to a fund with a lower NAV that was launched more recently.

Relation of NAV with SIP

When investing through an SIP, a fixed amount of money is invested at pre-determined intervals, giving the benefit of rupee-cost averaging. This basically means that more units can be purchased when the NAV is low, and less are purchased when the NAV is high. This decreases the impact of market volatility on the overall portfolio. The overall success of an SIP is, however, dependent on consistency, patience, and long-term investing. 

To conclude, having a clear understanding of NAV and how it is calculated can help you in making informed investment decisions. An investor should know the common myths related to NAVs, in order to make a more rational and prudent choice. Investors can also seek the guidance of a mutual fund distributor who can understand their financial needs and risk profile and handhold them throughout their investment journey.