Net Asset Value (NAV) in Mutual Funds: Definition & Formula

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.

Table of contents

What is the Net Value of Assets for Mutual Funds?
How to calculate NAV of mutual funds?
How Net Asset Value works?
Types of NAV: Open-end vs closed-end funds
Importance of Net Asset Value (NAV) in mutual fund investment
Role of NAV in the performance of a fund
How is NAV relevant for investors?
Common misconceptions about NAV

What is NAV in mutual fund?

Net Asset Value (NAV) in a mutual fund represents the per-unit value of a scheme. It is calculated at the end of every business day. It indicates how much one unit of the mutual fund is worth, after accounting for the total value of its assets and deducting liabilities and expenses.

The assets of a mutual fund scheme may include equity shares, debt instruments, money market instruments, cash, and receivables. Liabilities may include accrued expenses such as management fees, registrar charges, custodian fees, and other operational costs.

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)

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).

How does Net Asset Value work?

Key aspects of how NAV works are as follows:

Market-linked valuation: The value of underlying securities can change daily based on market prices. This causes the NAV to fluctuate.
Purchase and redemption pricing: For open-ended schemes, investors buy and redeem units at the applicable NAV, subject to cut-off timing rules prescribed by SEBI.
Impact of expenses: The expense ratio of a scheme is adjusted in the NAV calculation, which may influence overall returns over time.
Not an indicator of affordability: A lower NAV does not mean a scheme is more affordable, nor does a higher NAV indicate better performance. Returns depend on percentage growth, not the absolute NAV level.

Types of NAV: Open-ended vs closed-ended funds

Net asset value (NAV) is calculated for both open end and closed end mutual fund schemes. However, the way investors transact based on NAV differs between these structures.

Open-ended funds: Open-ended schemes allow investors to buy and redeem units directly from the mutual fund at the applicable NAV. These schemes do not have a fixed maturity period.
Close-ended funds: Closed-ended schemes have a fixed maturity period. Units are offered during a New Fund Offer (NFO) and can only be redeemed from the asset management company upon the scheme’s maturity. The fund may be listed on stock exchanges in the interim period and investors can buy or sell units at the market price, which may trade at a premium or discount to NAV. However, liquidity in close-ended funds may be limited, depending on market demand.

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.

How is the Net Asset Value relevant for investors?

The Net Asset Value (NAV) is an important factor in how investors engage with mutual funds. Below is an overview of its significance:

Determining purchase and redemption price: The price at which an investor buys mutual fund units is based on the current NAV. Similarly, when units are redeemed (sold), the value received depends on the NAV of that day.
Tracking fund performance: Changes in NAV over time indicate how the fund is performing. Monitoring NAV movements helps investors understand how the fund’s underlying assets are doing. Comparing NAV growth against benchmark indices can provide insights into the fund manager’s effectiveness.
Evaluating investment value: NAV gives a per-unit valuation of an investor’s holdings . This helps investors assess their current market position and track investment growth or decline.

Common misconceptions about NAV

Net Asset Value (NAV) can occasionally be misunderstood when investors assess mutual fund schemes. While NAV reflects the per-unit value of a scheme on a given business day, it does not by itself indicate performance quality or future return potential. Clarifying misconceptions may support more informed investment decisions. Some common ones include:

Lower NAV means cheaper investment: A lower NAV does not mean the scheme is inexpensive or offers higher potential returns. Returns depend on percentage growth in NAV, not the absolute starting value.
Higher NAV indicates better performance: A higher NAV may simply reflect longer operational history or accumulated gains. It does not automatically indicate superior performance relative to other schemes.
New fund offers are more beneficial due to lower NAV: During a New Fund Offer (NFO), units are typically offered at ₹10. This does not make the scheme more favourable compared to an existing scheme with a higher NAV. Portfolio quality and strategy matter more than the starting NAV.
NAV remains relatively steady in all fund categories: NAV fluctuates daily based on the underlying portfolio.

Past performance may or may not be sustained in future.

Conclusion

Net Asset Value (NAV) is a crucial metric for investors in Indian mutual funds. It offers a way to measure a fund’s net assets per unit market value in a clear and standard manner. NAV is crucial for measuring the purchase and redemption price of units in relationship with fund performance and value to investors. In addition to showing the value of the fund, NAV should be compared to other metrics such as the fund’s Expense Ratio, investment strategy, and risk. If you are planning to take the SIP route, a SIP calculator helps you plan better by showing how small, regular investments can grow over time and support your long-term financial goals.

FAQ

What is NAV full form?

NAV full form in mutual fund is Net Asset Value

What do you mean by NAV?

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.

Are there any disadvantages to considering NAV as a sole investment criterion?

Yes, the NAV might not give a complete picture of a fund’s performance. It is better to consider other factors like fund managers expertise, expense ratio, investment objective etc.

Can a fund with lower NAV be better than a fund with higher NAV?

Yes, there is a possibility that funds that have given higher return over a period, have lower NAV than the one’s with a higher NAV. Any fund’s performance depends on the returns provided over a period and not the current day NAV.

Can NAV be used as an indicator of fund’s risk level?

No, NAV does not reflect on the risk level of a fund. This is usually dependent on asset allocation, investment holdings, past performance, and the variety of securities in which investments have been done.

How often is NAV calculated and published?

In India, mutual fund schemes calculate and publish NAV on every business day. The value is calculated at the end of the business day and subsequently published on the Association of Mutual Funds of India’s (AMFI) website and on the respective fund house’s website.

What is the difference between NAV and market price?

NAV represents the per-unit value of a mutual fund’s underlying assets after deducting liabilities. It is calculated by the fund house. Market price applies mainly to listed instruments such as ETFs and closed-ended, where units trade on stock exchanges and could be at a premium or discount to their NAV.

How does NAV impact Systematic Investment Plans (SIPs)?

In an SIP, a fixed amount is invested at regular intervals, and units are allotted based on the NAV that is applicable at that time. When NAV is lower, more units are allocated; when higher, fewer units are allotted. Over time, this may average purchase cost, subject to market risks.

Can NAV be negative?

The NAV of a scheme may rise or fall based on market movements, but it generally cannot be negative. Even if portfolio values decline significantly, the NAV may fall sharply but typically remains above zero, since mutual fund investments are backed by underlying assets and operate within a regulated framework.

Is NAV the only factor to consider before investing in mutual funds?

No, NAV alone does not determine suitability or potential for returns. Investors may also evaluate fund category, risk level, portfolio composition, expense ratio, fund manager approach, past performance benchmark comparison, taxation rules, and alignment with financial goals. Past performance may or may not be sustained in future.

How is NAV calculated in closed-end funds and ETFs?

For closed ended funds and ETFs, NAV is calculated similarly to open ended schemes by dividing net assets by the number outstanding units. However, since these units are listed on exchanges, they may trade at a premium or discount to the NAV.