What is Net Asset Value (NAV) in mutual funds?

Net Asset Value, usually referred to as NAV, is the market price of each unit of a mutual fund. When a mutual fund scheme is launched through a New Fund Offer (NFO), the Asset Management Company (AMC) assigns the face value at which investors can buy units. After the NFO, the capital pooled from investors is used to invest in various assets and securities. As the value of assets changes in the market, the net asset value of the mutual fund changes with it.

If you want to know the net asset value meaning, just think of it as the latest market price of each unit of the mutual fund scheme.

What is the Net Value of Assets for Mutual Funds?

The net value of assets for a mutual fund is calculated at the end of each trading day. It’s components include:

Total market value of assets:
- This includes all the securities (like stocks, bonds, and cash equivalents) held by the mutual fund. Each security’s market value is based on the closing price on the day the NAV is calculated.
Liabilities:
- These are expenses or obligations owed by the mutual fund, including management fees, transaction fees, and any other accrued costs.
Outstanding units:
- These are the total number of units (or shares) currently held by all investors in the fund.

How to calculate NAV of mutual funds?

Now that you know all the components of NAV in a mutual fund is, you may be wondering how it is calculated. Here is the simple formula for calculating the Net Asset Value of a mutual fund:

NAV = {(Market Value of the Mutual Fund) + (Current Assets) – (Current Liabilities and Provision)} / (Total Number of Outstanding Units)

Example

To understand the NAV meaning, let’s take a simple example.

If a mutual fund has Rs. 4 crore invested in securities and Rs. 1 crore in cash. The total assets of the mutual fund stand at Rs. 5 crore (Rs. 4 crores + Rs. 1 crore). Now suppose the liabilities of the fund stand at Rs. 50 lakh. This makes the total value of the mutual funds to be Rs. 4.5 crore (Rs. 5 crores – Rs. 50 lakh). If the fund has 1 lakh outstanding units, then the Net Asset Value of the mutual fund would be Rs. 450 (Rs. 4.5 crore / 1 lakh).

Importance of Net Asset Value (NAV) in mutual fund investment

When investors want to invest in mutual funds, they look at the Net Asset Value of the mutual fund because it helps to:

Get daily updates:The Securities and Exchange Board of India (SEBI) mandates AMCs to declare the NAV for each scheme on a daily basis. Investors who want to redeem units or invest in a mutual fund can get daily updates by keeping an eye on the NAV. They can make a buying or selling decision based on the NAV and other performance parameters of the scheme.

As the NAV definition tells you, it is the price per unit of the mutual fund. However, it is important to consider other parameters in addition to the NAV before making an investment decision.

Role of NAV in the performance of a fund

NAV gives investors an overview of the performance of their mutual fund, though it is best analysed in combination with other performance metrics and benchmarks. Here are some things that NAV can indicate:

Performance:The change in NAV over a given period helps measure the fund’s rate of return.
Daily valuation indicator: NAV is recalculated daily based on the end-of-day market prices of the securities in the fund. This allows investors to understand the real-time value of their holdings and track short-term performance.
Entry and exit pricing: For open-end mutual funds, NAV is the price at which units are bought and sold. If the NAV at the time selling units is higher than the per-unit price at the time of investment, the investor makes gains.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.