What is mutual fund NAV and how to calculate it?

Financial literacy in India is on the rise. As a result, more individuals than ever are looking to invest their hard-earned money. However, with numerous investment options out there, making the right choice can sometimes be difficult and confusing.

Hence, it’s important to have your fundamentals clear. Stocks and mutual funds, though seemingly similar, are quite different.
One of the major differentiators between stocks and mutual funds is NAV.

NAV stands for Net Asset Value. In simple terms, it is the per unit price of a mutual fund scheme. Let’s dive deeper.

• Table of contents

1. What is NAV in mutual funds?
2. How is NAV calculated?
3. Role of NAV in the performance of a fund

What is NAV in mutual funds?

Mutual fund schemes pool the assets of their investors and invest them in various securities. For instance, imagine a fund house launching a new fund offer, through which it manages to raise Rs.100 crore from 1 lakh investors. It will then create units of this capital and allocate them to investors.

Typically, when a new fund is launched, the initial unit price is set at Rs.10 or Rs.100 or Rs.1000. This means that for a fund having assets of Rs.100 crore, there will be 10 crore units that will be created if the face value is Rs.10 each.

Investors will get units proportionate to their share in the pool. An investor who has put in Rs.10,000 will get 1,000 units.

Once the scheme starts investing in the market, the following will happen:

• The value of the fund’s assets will change with the changes in the market
• Some investors may want to redeem their units
• New investors may want to come in
• The fund will start deducting its management fee from the scheme

To reflect the impact of the above changes, the fund house publishes the Net Asset Value (NAV) of the scheme at the end of each day Effectively, the NAV represents the market price of one unit of the mutual fund,

How is NAV calculated?

The formula for calculating the net asset value is given below:

NAV={(Market or Fair Value of Scheme's Investment)+(Current Asset)-(Current Liabilities and Provision )} /(Number of Outstanding Units Under the scheme)
Let’s discuss this with an example on Day 1 of the mutual fund scheme after it is launched.

Day 1:
The fund invests Rs.98 crore in stocks while keeping Rs.2 crore in cash (to pay for any redemptions that may come in from investors).

Let’s assume the market witnessed a high that day, and the stock portfolio grew by 2%. This would mean that the fund’s assets would grow to Rs.101.96 crore (Rs.98 crore stock portfolio increased by 2%, plus Rs.2 crore in cash).

The fund house also charges an annual expense ratio, effectively the management fee of 2%. When divided by 365 days, the fee would come to Rs.55,868 for that day on the overall asset value.
The NAV at the end of the day will be:
(Rs.101.96 crore – Rs.55,868)/(10 crore units)
NAV = Rs.10.19
(For illustrative purpose only)

To summarise:
The value of ‘Total Assets’ is the total market value of all securities held in the mutual fund inclusive of profits. It also includes liquid assets such as cash, dividends, etc.
The value of ‘Total Liabilities’ is the summation of all outflows that are due, such as payments outstanding, repayment of lenders, management fees, operating expenses, etc.
The ‘Total Number of Outstanding units’ is the number of units held by all the unitholders combined.

Day 2:
Let’s assume that the fund’s stock portfolio was flat for the day, Rs.10 lakh fresh capital came in, while Rs.3 lakh was withdrawn by investors, here is how the impact will play out.

The value of the pool will be calculated thus:
Current Assets (101.95 crore) + Fresh Capital (Rs.10 lakh) – Redemption (Rs.3 lakh) – Liabilities (Rs.55,868)
This will be divided by the number of units. Since the fund witnessed net inflow of Rs.7 lakh at the day’s NAV of Rs.10.19, it will result in an addition of 68,694 units to the existing 10 crore units.
Accordingly, the NAV for Day 2 will be calculated.

Role of NAV in the performance of a fund

The role of the NAV isn’t just restricted to the price at which investors can buy or sell units. Since the NAV reflects the performance of the securities held in the portfolio, it reflects the performance of the scheme adjusted for fees.

This means, in order to judge how the scheme is performing, investors can compare the NAV change (in percentage terms) of one mutual fund scheme versus another, or versus its benchmark.
Investors can also use the NAV to judge the performance of the fund over any particular period, such as during the last fiscal year.

Conclusion:

As an investor, it is crucial to know how much your investment grew after entering the fund. Mutual fund NAV helps investors figure out how many units of the fund will they be allotted for the amount that they have invested
Mutual fund NAV does not signal if the fund is an attractive investment option. To gauge a fund’s performance, investors will have to look at other metrics, such as drivers of the NAV’s growth.

FAQs:

What is NAV full form?

NAV full form in mutual fund is Net Asset Value

What does an NAV tell you?

The NAV of a fund tells you the per-unit market price of a mutual fund scheme. It is effectively the price at which you can buy units of a fund.

Does a low NAV mean a fund is a good investment opportunity?

No, a low NAV only means that the fund has a lesser market value. Nonetheless, it can be compared with the NAV of other mutual funds or the current market price of securities.

What should be the NAV of mutual funds?

There is no ‘desired’ price at which the NAV should trade at. For instance, a mutual fund scheme that has been in existence for several decades may have seen its NAV grow over time, while a new fund may have an NAV less than Rs.100. It does not have any bearing on the fund’s performance.

Should I buy when NAV is low?

An NAV should not be an indicator on whether you should buy or not buy a fund.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.