NAV in SIP explained: Definition, calculation, and impact on returns

Systematic Investment Plans (SIPs) have become a popular route for Indian investors looking to potentially build wealth over time through mutual funds. They allow individuals to invest in instalments, spreading the cost of their investment over time and making it more affordable.

One frequently discussed topic among SIP investors is the Net Asset Value (NAV). Understanding the concept of NAV in SIP can help you make informed decisions, monitor your investments more effectively, and evaluate the potential returns of your mutual fund portfolio.

In this article, we will explore what NAV means, delve into the calculation of NAV in SIP, and see how it can affect the performance of your investments. We will also walk through an example of NAV calculation to illustrate these concepts clearly.

• Table of contents

• Understanding what NAV means in SIP
• How is NAV calculated?
• Illustrative example of NAV calculation in SIP

Understanding what NAV means in SIP

The NAV is the per-unit price of the mutual fund, generally updated daily. Whether you invest in SIP or lumpsum, you purchase units at the NAV. However, because an SIP involves multiple investments spread out over weeks, months or years, you end up buying units at varying NAV levels.

So, what is NAV in SIP? It is the net value of each fund unit. When the per-unit value is high, your instalment purchases fewer units and when the NAV is low, the same instalment fetches higher units. Over time, this can reduce the per-unit price of your investment, a phenomenon known as rupee-cost averaging.

Rupee-cost averaging can also mitigate the impact of volatility on the investment, as it prevents you from overweighting your portfolio during market peaks and helps you potentially leverage market dips by purchasing more units when markets are down.

Read Also: What is SIP in mutual fund investment and how does SIP work?

How is NAV calculated?

Each business day after the market closes, the fund updates its NAV. The formula for the calculation of NAV in SIP or lumpsum is:

NAV = (Market value of all holdings – Liabilities) / Total number of units

Here is the process:

1. Assess the market value of the fund’s securities, such as stocks or bonds.
2. Subtract any liabilities, including operational costs, management fees etc.
3. Divide by the total outstanding units to get that day’s NAV.

For SIP investors:

• You purchase more units when the NAV is lower and fewer units when it is higher. This is known as rupee-cost averaging.
• The expense ratio, part of the fund’s liabilities, slightly reduces the NAV before it is declared.

Illustrative example of NAV calculation in SIP

Consider this example of NAV calculation:

• The fund’s securities are valued at Rs. 10 crore.
• Liabilities add up to Rs. 10 lakh.
• The fund has 50 lakh units outstanding.

Using the calculation of NAV in SIP:

NAV = (Rs. 10 crore – Rs. 10 lakh) / 50 lakh
NAV = Rs. 9.9 crore / 50 lakh
NAV = Rs. 19.80

If you invest Rs. 1,000 at this NAV:
Units = Rs. 1,000 / Rs. 19.80 ≈ 50.50 units

Any change in the fund’s holdings or expenses will affect the NAV. By investing periodically, you accumulate units at different prices, potentially lowering your overall cost via rupee cost averaging.

Read Also: What is stock SIP and who should invest in it?

Conclusion

NAV in SIP directly influences your returns by determining the number of units you acquire at each installment. Factors such as market movements, operational fees, and overall liabilities impact the NAV. Monitoring this value helps you gauge the performance of your chosen mutual fund and understand how your money is deployed.

Always evaluate your financial objectives and risk appetite before making investment decisions. For personalised advice, consult a qualified financial advisor who can guide you in selecting funds that suit your needs.

FAQs:

What factors can cause the NAV of my SIP to fluctuate?

Primarily, changes in the market prices of the fund’s holdings and variations in liabilities (such as management fees) impact the NAV. If the portfolio’s value rises, the NAV goes up; if it declines, the NAV goes down.

How does the NAV impact the long-term returns of my SIP investment?

Your SIP contributions buy varying numbers of units at different NAVs. Over time, this cost-averaging approach can reduce volatility and reduce the per-unit price of your investment. You make gains if the NAV at the time of selling units is higher than the NAV at which you purchased it.

Is a lower NAV always better when investing through a SIP?

Not necessarily. A low NAV simply indicates a lower per-unit price. The difference between the NAV at the time of purchase and the NAV at the time of sale of units determines the potential returns.

Where can I find the daily NAV of my SIP mutual fund?

Asset Management Companies declare the NAV for each scheme at the end of each trading day and also display the information on their websites. You can also check the Association of Mutual Funds in India (AMFI) site, financial newspapers, or investment apps for updated figures.

How do expense ratios affect the calculation of the NAV in a SIP?

Expense ratios are included in the fund’s liabilities and are deducted from the total market value of the assets when calculating NAV. Thus, a higher expense ratio translates into a lower NAV.