Mutual funds are strongly associated with Net Asset Value. NAV or Net Asset Value is critical to making smart investment decisions, whether for an experienced or beginner investor.

NAV can be interpreted as the cost per unit, and it gives an investor an idea of the fund’s worth at a particular point in time.

It is important to determine what NAV does, how it functions, and how it influences an investor’s returns. This guide will help with information about NAV’s meaning, the formula involved, and the roles it plays in investing in mutual funds.

NAV Meaning and Definition

NAV stands for Net Asset Value. The performance of a mutual fund scheme is reflected by its NAV per unit. Unlike equities, where the stock market determines the price and changes from minute to minute, NAVs of mutual fund schemes are declared at the end of each trading day after markets are closed, in compliance with SEBI Mutual Fund Regulations. Here are key features:

  • It is the value of one unit of a mutual fund.
  • It helps investors know at what value any given point of time holds each unit of a mutual fund.
  • It helps in monitoring the performance of a mutual fund.
  • NAV shows how the fund’s assets have performed.
  • When the value of a fund’s assets goes up, the NAV goes up, and vice versa.

Net Asset Value Formula

NAV = Total Assets – Total Liabilities/ Number of Outstanding Units

  • Total Assets – Mutual funds, including the current market value of equities, bonds, etc.
  • Total Liabilities – The financial obligations of the fund, including management fees, transaction fees, etc.
  • Total Units Outstanding – The total no. of units or shares outstanding in the mutual fund that belongs to the investors.

NAV Example

Let us consider a mutual fund with ₹50 crores worth of assets and liabilities amounting to ₹2 crores. If the outstanding units amount to 10 lakh units, its NAV would be calculated as:

NAV = (₹50 crores – ₹2 crores) / 10 lakh units

= ₹48 crores / 10 lakh units

= ₹480 per unit

This depicts that each mutual fund unit is worth ₹480.

If the market price of the fund’s assets increases to ₹55 crores, the NAV will increase too, and vice versa.

Note: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to the use of this information. 

Roles of Net Asset Value (NAV)

Understanding the roles of NAV not only aids in evaluating a fund’s potential returns but also enhances overall investment strategy, making it an essential concept for both novice and experienced investors. The NAV performs several functions:

  1. Mutual Fund Units Pricing: The NAV influences the buying and selling price of mutual fund units. Investors consider the current NAV when purchasing mutual fund units.
  2. Performance Benchmark: NAV helps indicate performance in a mutual fund. It helps ascertain the profits or losses earned by the investor over time compared to the time he invested in the fund. This is done by comparing his current NAV with the purchase NAV.
  3. NAV for Fund Evaluation: NAV calculates the net value in terms of the total assets held under the mutual fund. It allows investors to know how effectively a fund manages the portfolio.
  4. Distribution of Dividends: NAV showcases the negative impact of dividends or capital gain being issued from a mutual fund. The NAV decreases usually by the amount of the amount distributed as a dividend.
  5. Investment Strategy Indicator: NAV helps understand how mutual funds are invested. An increasing NAV indicates a well-managed fund as its assets are rising, and a declining NAV reflects unevenness in the investments.

How Does Net Asset Value Work?

NAV is calculated at the end of each trading day to highlight the market value of the fund’s assets. A company calculates the NAV after considering modifications in the fund’s assets and liabilities during the day.

Once the NAV has been updated, the investors can use the price to buy or sell units the following day. An exception to this is open-ended mutual funds, where investors can buy and sell units at the existing NAV.

How Net Asset Value Affects the Investor’s Returns

A higher NAV is associated with a better-performing mutual fund. However, comparing two mutual funds just using NAVs is not recommended. It depends on other factors like changes in NAV and other internal and external factors.

Example

If the NAV of a mutual fund increases from ₹100 to ₹120, it is evident that the investor has earned ₹20 per unit. The investor loses ₹20 per unit if the NAV falls from ₹100 to ₹80.

It also needs to consider dividends. When dividends are paid, NAV falls by the dividend amount.

Although a lower NAV at the end of the period after declaring dividends may seem less attractive, the investors earn revenue when the dividends are distributed.

What Is the Net Asset Value for Mutual Funds?

Here’s how the components for NAV calculation break down:

  1. Assets: The assets of a mutual fund are the total market value of all investments in the fund, including shares, bonds, account receivables, and even cash. This value is estimated daily, considering the closing prices of the securities in the portfolio. Cash reserves, liquid assets, interest payments, and dividends that are due to the fund form a part of these “assets.”
  2. Liabilities: Liabilities of a mutual fund include outstanding payments or money due to lenders, operational costs, and all other fees. Other liabilities that may be evident in some funds include international liabilities; they may include money payable by foreign investors or the proceeds from international sales that are not yet disbursed. Accrued liabilities may include salaries, operating costs, management fees, and utility expenses.

How Is Net Asset Value Relevant to Investors?

Most people are confused by NAV and a company’s stock price as they are calculated differently. The stock price only considers a company’s liquid assets, whereas the NAV considers the liquid and non-liquid assets the mutual fund owns.

Thus, the NAV gives an overview of a mutual fund’s financial condition. It helps investors estimate the value and performance of their chosen funds.

Role of NAV in Mutual Fund Performance

Some investors believe that a low NAV means the investment is cheap and better. Again, such a criterion when picking a fund does not include the performance and profitability of the mutual fund.

NAV helps demarcate how the fund’s assets have performed in the past. However, it is not recommended to just depend on NAV when choosing which mutual fund to buy.

It is important for the investor to consider other factors like:

  • General returns of the fund
  • Investment objectives
  • Risk factors
  • Performance of the fund manager
  • Performance track record of the fund
  • Historical returns
  • Market conditions

A low or high NAV does not automatically make any fund a good or bad investment. NAV is more useful for tracking the fund’s day-to-day performance and understanding how its assets are valued.

Examples of How NAV Works in Equity and Debt Funds

1. Equity Funds

The NAV of an equity mutual fund depends on a stock’s performance. For example, an equity fund has ₹200 crore of stocks and liabilities of ₹10 crore. If the outstanding units are 1 crore, the NAV would be ₹190 per unit. If the market value of the stocks increases to ₹220 crores, then the NAV would also rise proportionally.

2. Debt Funds

There are debt funds that focus on investing in fixed-income securities. The NAV of debt funds varies much less than that of Equity Funds because such assets are less volatile.

For example, if a debt fund holds bonds worth ₹100 crores and the liabilities are at ₹5 crores, with 50 lakh units outstanding, the NAV works out to be ₹190 per unit. Interest rate changes or changes in the credit rating of the bonds would influence the NAV but in a less volatile form than equity funds.

Conclusion

Understanding Net Asset Value revolves around evaluating and controlling mutual fund investments. It is clearly defined for the value of funds and is part of pricing, performance measurement, and overall management related to units in mutual funds.

Though NAV is a crucial tool for investors, investors cannot determine a fund’s success based on its value. Several other internal and external factors affect the future returns that investors might expect.

This way, investors can make smart choices based on their financial objectives and risk profiles, using proper NAV and considering other considerations.

Note: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to using this information.