Investing in mutual funds can be a great way to build wealth in the long run. Over the years, the Indian mutual funds market has seen a great growth curve and increased participation from all, including residents, NRIs, and OCIs. However, before investing in mutual funds, it is advised to understand the basics of it. One such basic concept that’s often overlooked is the Net Asset Value of NAV. In this blog, we’ll explain what NAV in Mutual Fund is, how it’s calculated, the NAV formula, NAV in SIP, and its role in helping understand the mutual fund investing.
What is NAV in Mutual Funds?
If you ever look into the mutual fund investment, you’ll see the term NAV with the funds. The full form of NAV is Net Asset Value. NAV is the per-unit price of the mutual fund. Mutual fund investments are bought or sold based on the NAV of the fund. NAV of mutual funds is calculated daily and helps to track the performance of the mutual fund scheme.
The expenses also denoted by the Total Expense Ratio (TER) are adjusted against the assets of the mutual fund scheme, after which the Net Asset Value (NAV) of the fund is calculated, providing an accurate representation.
Each mutual fund scheme, plan, and option has its unique Net Asset Value (NAV). For example, a scheme may have separate NAVs for regular plans and direct plans, as well as different NAVs for growth and dividend reinvestment options. To calculate NAV per unit, this value is divided by the number of units outstanding.
Also read: 10 Mutual Funds That Doubled Wealth In 5 Years
Formula of Net Asset Value (NAV) in Mutual Funds
Net Asset Value (NAV) is calculated based on the below formula:
Net Value of an Asset = (Total Asset – Total Liabilities) / Total Outstanding units of the fund.
- Total Assets: This includes all the securities (stocks, bonds, etc.) and cash held by the mutual fund.
- Total Liabilities: These are any debts or obligations the fund owes, such as fees or expenses.
- Total Number of Shares Outstanding: This is the total number of shares that investors hold in the mutual fund.
Here “Total Asset Value” represents the overall worth of the mutual fund’s investments, including the latest closing prices of the stocks on the relevant stock exchange, along with any earned income and amounts owed to the fund. This value is then reduced by any outstanding debts, liabilities, and expenses owed by the fund.
Also read: What is the 15x15x15 Rule In Mutual Funds for NRIs?
How is the NAV of Mutual Fund calculated?
The Net Asset Value (NAV) of mutual funds is calculated on a daily basis after the closure of the stock market, i.e. after 3:30 pm. This is done by following the aforementioned formula where the mutual fund companies evaluate the total worth of the portfolio by adjusting the expenses and liabilities of the funds.
How is NAV in SIP calculated?
If you do a SIP in any mutual fund scheme, you’re to see units allotted to you. But how is the units for SIP in mutual funds calculated?
For example, you want to do a SIP of Rs 15,000 in a fund. The current NAV of the fund is Rs 100. Then you’ll receive 150 units (Rs 15000/100) of the fund. Furthermore, when the next SIP period comes in, let’s say the NAV has increased to Rs 120. Now, during the second SIP installment, you’ll receive 125 units (Rs 15000/120). Subsequently each SIP tenure onwards, the allotted units will be based on the NAV price.
Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs
When is the right time to calculate the NAV?
A mutual fund’s Net Asset Value (NAV) cannot be determined while the stock market is open because the prices of the basic securities fluctuate constantly. NAV calculation occurs after the market closes, using the closing prices of the fund’s securities for that day.
Mutual Fund NAV vs. Stock Prices
The pricing system for mutual fund shares, represented by their NAV, differs significantly from that of common stocks or equities. While equities are issued by companies and traded on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange(BSE), mutual fund NAVs are determined by factors such as the fund’s assets, expenses, and outstanding shares.
Unlike stocks, which are subject to market demand and supply forces, a mutual fund’s NAV reflects the value and expenses of its underlying assets. However, NAV alone doesn’t show the fund’s performance. Instead, a mutual fund’s performance is best evaluated based on its total return, considering both the securities performance and any dividends paid to investors. So, while NAV is essential for valuing mutual fund shares, it’s not the sole indicator of a fund’s performance in the Indian context.
Also read: How understanding the Rule of 8-4-3 can turn your Rs 30,000 monthly into Rs 1.5 cr?
Role of NAV in Mutual Funds:
- Buying and Selling: NAV determines the price at which investors can buy or sell shares in a mutual fund. When you invest in a mutual fund, you’ll typically buy shares at the NAV price. When you sell, you’ll receive the NAV per share.
- Tracking Performance: NAV helps investors track the performance of their mutual fund investments. By comparing the NAV over time, investors can gauge how well their investment is doing.
- Cost Basis for Taxes: When investors sell mutual fund shares, the difference between the sale price and the purchase price (adjusted for any dividends or capital gains) is the taxable capital gain or loss. The NAV at the time of purchase serves as the cost basis for tax calculations.
- Portfolio Management: Fund managers use NAV to make decisions about buying and selling securities within the fund. They aim to maximize returns for investors while managing risk.
Also read: Step-by-Step Guide for NRIs to Pick a Winning Mutual Fund
Wrapping Up
Understanding Net Asset Value (NAV) is crucial for mutual fund investors. It’s like knowing the price of each slice of a pie you own. NAV helps you decide when to buy or sell shares, track how well your investment is doing, and figure out your tax liabilities. Fund managers also use NAV to manage the fund’s assets wisely. By understanding NAV and its role, you’ll be better equipped to make smart investment decisions.
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FAQs
What do you mean by NAV?
- The full form of NAV is Net Asset Value. NAV is the per-unit price of the mutual fund. Mutual fund investments are bought or sold based on the NAV of the fund. NAV of mutual funds is calculated daily and helps to track the performance of the mutual fund scheme.
Where Do You Find the Net Asset Value per Share of a Mutual Fund?
- The net asset value per share (NAVPS) of a fund is typically shown alongside its price on a financial website. While this value is close to the fund’s actual market price, it may vary slightly because NAVPS is calculated once daily, whereas the fund’s assets can change in value throughout the day.
What Causes a Change in the Net Asset Value of a Mutual Fund?
- Changes in a fund’s portfolio holdings cause fluctuations in the value of the fund’s assets, resulting in NAV changes. Moreover, NAV can also be affected by alterations in the fund’s liabilities.
Is NAV the same as book value (BV)?
- Book value is used to calculate the rooted values of a particular company, by subtracting the firm’s liabilities from its assets calculated on its balance sheet. This is a similar calculation to a fund’s NAV, but a fund’s assets are themselves shares of companies.
Is a High NAV Good or Bad?
- A high NAV alone doesn’t signify much except that the fund owns more valuable assets. What matters is comparing NAVs relative to each other, like comparing one growth fund’s NAV to another’s. It’s also crucial to compare a fund’s NAV to its market price. If the NAV is significantly higher than the current market price, it could indicate a favorable buying opportunity.
What is good NAV in mutual funds?
- Just because a fund has a high NAV doesn’t mean much on its own, except that it owns valuable stuff. What matters is comparing NAVs between different funds, like checking how one growth fund’s NAV compares to another’s. Also, it’s important to compare a fund’s NAV to what it’s selling for in the market.
What happens if NAV increases?
- When the NAV increases, you’ll receive a lesser allotment of units of mutual funds. It also means that more investors are buying the units than selling them causing the fund’s assets to increase and subsequently the NAV to increase. This results in lesser units allocation if an investors makes fresh lumpsum or SIP investment.
What if NAV is low?
- When the NAV is low, you’ll receive a higher number of units of mutual funds as an allotment. For say, if you want to invest Rs 15,000 and the previous NAV was Rs 100, you’d have received 150 units (Rs 15000/100). Now the NAV is at Rs 75, then you’ll receive 200 units (Rs 15000/75) despite the same investment value. This helps in the rupee cost of averaging.
Is NAV calculated daily?
- The Net Asset Value (NAV) of mutual funds is calculated on a daily basis after the closure of the stock market, i.e. after 3:30 pm.
Why NAV is calculated daily?
- A mutual fund’s Net Asset Value (NAV) cannot be determined while the stock market is open because the prices of the basic securities fluctuate constantly. NAV calculation occurs after the market closes, using the closing prices of the fund’s securities for that day.
Why is NAV important to investors?
- NAV helps investors understand the current price per unit of the mutual fund. It also helps investors understand the worth of their investments in mutual funds.
