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What is Mutual Fund NAV?

You will find it hard to get hold of people who do not want their money to grow. After all, you put in so much effort into earning money; wouldn’t it be great if your money could work hard as well? Wouldn’t it be amazing if your money earned more money on its own? The easiest way to turn these into reality is to invest your money. And what better way to invest your money than in a mutual fund.

There are various investment tools available at the disposal of an investor. But mutual fund offers substantially higher returns when compared to a lot of them. What makes them lucrative is that they are professionally managed as well. And by paying nominal charges, you get direct access to such funds. Regular investments via Mutual Funds are known to garner discipline into investors. And most importantly, a mutual fund has convenience written all over it. They are easy to access, buy and redeem, thus, making them one of the best modes of investment.

Net Asset Value (NAV)

While investing in a mutual fund, a term that you will almost certainly come across is NAV or Net Asset Value. This begs the obvious question of what a NAV is or how is it related to a mutual fund. In simple terms, the overall cost of a mutual fund entirely depends on the per unit value. This per unit value is commonly known as Net Asset Value.

Once you add up all the assets held by a mutual fund, be it equity based, debt based, cash, dividends earned, etc. and divide it by the total number of units available, NAV is what you get. Some people also refer to it as the value of a unit as per the book.

During the initial phases of a mutual fund, they usually start with INR 10 as the unit price. As the fund’s performance gets better or as the fund accumulates more assets over time, the NAV increases. Under most circumstances, you will find that NAV of a popular fund or a well performing fund to be higher than that of a fund that isn’t all that popular with the investors.

As an investor, is the NAV relevant to you? The NAV of a mutual fund might be one of the reasons to take a closer look at the fund but it cannot be the deciding factor. For instance, if you take a look at two funds, one having a unit price of INR 100 and the other of INR 150, the latter might seem expensive. If you were to invest INR 10,000 you would bag more units with the first fund.

However, it might not always be the most accurate observation. The constitution of a fund is more important in this case. For the sake of simplicity, if we assume that both the funds have the same composition, the NAV might not make much of a difference.

Another misconception that investors usually have is that NAV is similar to Market Price of a share. There are a lots of differences between both of them. A company must list their shares in the stock exchange to make it open for everyone to trade. And factors such as the company’s potential, demand and supply play a crucial role in deciding the market price of a stock. That isn’t quite the case with a mutual fund.

How Is NAV Calculated?

Now that we are aware of what NAV is, knowing how it is calculated will make the idea of a mutual fund furthermore clear. There are two primary calculations that come into the picture as far as NAV is concerned, General NAV calculation and daily NAV calculation.

General NAV Calculation

The general calculation is what helps you figure out how many units you can buy. For an example, if the NAV of a mutual fund is INR 150, that is exactly the amount you must pay to buy one unit of the fund. Another way of seeing it would be, if you were to invest INR 15,000 in the fund, you would receive 100 units. Any ups and downs in the NAV would transversely affect your portfolio. Mutual funds see a revision in their prices on a daily basis and that is why daily NAV calculation is important to understand.

Daily NAV Calculation

The stock market closes at 3:30 Pm on a daily basis. Thus, it is also the time when the mutual fund companies need to assess the values of their assets. On the next day, the market opens with the previous day’s close price. It is only after the market closure that the various fund houses calculate the NAV of their funds.

Addition of money in the bank account is added to the assets and any amount that is payable to some entity or the other is subtracted from the fund. There are several management related expenses, which the fund manager deducts from the total assets. The amount that is left is then divided by the total number of outstanding units allotted for the fund. And this is how the Daily NAVs are calculated.

Majority of the mutual funds out there are open-ended. This means that there could be a regular inflow of cash or outflow in the form of redeeming of units. These also have an impact on the NAV of a mutual fund. The fund manager can sell shares or buy some to adjust the book accordingly. The following formula should make the NAV calculation a bit easier to understand.

Net Asset Value of Fund = [Total Assets – (Various Expenses + Liabilities)]/Total number of outstanding units

Net Assets of Schemes

Let us consider a Mutual Fund where investors have bought about 10 crore units at the price point of INR 20 each. A simple calculation reveals that the fund has managed to garner INR 200 crore.

The fund managers place INR 150 crore into the equity market which appreciates by 10%.

Assuming another INR 70 crore from the investors is put into various bank accounts.

Now the interest and dividends earned from the above stand at INR 10 crore.

And for the sake of simplicity, we will assume certain scheme related expenses amount to INR 4 crore and additional expenses of INR 1 crore are to be borne.

From the information that we have, one can deduce the following details.

Expense HeadAmount (in INR crore)
Total capital (10 crore units of INR 20 each)200
Total profits (INR 10 crore interest and dividend minus total expenses of INR 5 crore (scheme related and other expenses)5
Appreciation of capital (10% of INR 150 crore)15
Net funds for investors220
Assets of the Fund-
Current market value of investment165
Deposit in the banks (INR 70 crore plus interest and dividends INR 8 crore minus various expenses 5 crore)73

It can be seen from the above, that the total assets for the mutual fund include the total investment amount plus the profits arising out of it. It includes any appreciation of the investments along with interests or dividends earned.

The net assets or the net funds for investors in the above table will increase or decrease based on the underlying securities. For instance, if the equity investments of INR 150 crore were to appreciate only by 5%, the appreciation would be INR 7.5 crore. And the net assets would be INR 212.5 crore.

Ensuring that all relative payments are taken care of allows for a better realization of profits or losses. The same goes for profits as well. Irrespective of whether or not the amount is deposited to the bank accounts, the profits are calculated.

A simple way to calculate the NAV for the above example would be to divide the net assets with the total number of units. In the above example, INR 220 crore divided by 10 crore shares. This gives a NAV of INR 22 for the mutual fund.

Here are a few key takeaways related to NAV from the above.

  • If a mutual fund earns more interests, dividends or capital gains, the NAV will shoot up.
  • If there is a higher appreciation of the investments, the NAV would also go up.
  • The NAV of a scheme would also be higher if the related expenses are low.

What is Portfolio Valuation?

Portfolio valuation plays a crucial role in determining the NAV of a mutual fund. One can easily quantify the exact holdings of specific securities for a mutual fund, however the valuations of the same can be a bit difficult. The following guidelines should help you compare NAVs better.

  • When you come across a security, such as shares of a company, its closing price for the specific day is considered for the calculations. For example, if a fund has 5000 shares of a company whose market closure was at INR 150, the total value of the company’s holdings would be INR 7,50,000. Similarly, for other holdings as well.

  • In the event that a security is not traded on a day, another valuation formula can be used. It is based on the Book value of a stock, the EPS of the company and other similar shares.

  • Debt based securities are usually not traded like the equity ones. For their valuation, you can use yield matrix that valuation agencies offer.

  • As far Non-Performing Assets are concerned, there are a few norms that must be followed. These norms talk about the amount the can be written off, or when the amount can be added back to the asset value and when the NPA would qualify as a standard asset.

Role of NAV In Fund Performance

While the NAV of a mutual fund reveals a lot of things, it should never be the sole criteria for selecting a fund. As mentioned earlier, it must not be compared with the market price of a stock. If you compare the NAV of two different funds, it doesn’t give the clear picture. Nor does it provide any inputs from the future perspectives.

As we know, the NAV simply states the total value of a fund, once the expenses and liabilities are taken out of it. If a fund’s NAV is high, there are two possible outcomes. Firstly, the fund has performed well in the past and thus a higher NAV. Or, the fund has been around for a long time, thus the NAV’s have appreciated considerably. Thus, you should not base your purchase decisions on NAV’s alone.

FAQs on What is Mutual Fund NAV

Do you think a mutual fund with low NAV is better?

A mutual fund with lower NAV might only be able to help you more units for the same price. The NAV of a mutual fund does not reflect its capabilities or future performance. Thus, opting for a fund with lower NAV might not be the best decision.

How are NAV returns calculated?

There are two ways to calculate the returns of a NAV. The first calculation would be for the fund in general i.e. the returns that the fund has generated over time. The second is the returns that a fund generates for an individual.

To calculate the returns, you need to be aware of the initial return and the current return. Deduct the initial return from the current return and divide by 100. Example, Initial NAV 10, current NAV 12. Change in NAV is (12-10) 2. The return percentage is (2/10)*100 = 20%.

How do I choose a mutual fund through NAV?

One must not choose a mutual fund based on NAV. It doesn’t offer the most accurate picture, nor will it provide you with information regarding future prospects. There are other factors which can help you decide a mutual fund in a more precise manner.

How do you calculate NAV?

The simple way to calculate the NAV of a fund is to add all the assets, interests or dividends earned, appreciation in investments and deduct various administrative and scheme related expenses. Once you have the net assets, you must divide it with the total number of units available to calculate NAV.