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The quick and easy way to know about mutual fund NAV

It is a well-known fact that when you invest in mutual funds you are allotted certain units of that scheme. Now, the question arises, how does the fund figure out how many units are to be allotted to you?

This is where NAV comes into the picture! You get the units based on NAV of the fund. NAV is the per-unit value or per-unit price of a particular mutual fund scheme. For instance, you have invested ₹10,000 in a scheme and the today’s NAV of your scheme is ₹25, you will receive 400 units (i.e., 10,000/25) of the scheme. If the NAV was ₹50, you would have received 200 units. It is also called the book-value of the mutual fund.

How is it calculated?

Mutual funds invest the money collected from investors in securities markets. These securities can be Stocks, Bonds, Company Fixed Deposits, Futures & Options etc. They invest the corpus based on a scheme’s investment objective and type of a scheme. So, an Equity fund primarily invests in Stocks and the same way a debt fund invests primarily in a portfolio of debt securities.

To make these investments, the fund houses do incur some expenses and also have to bear some liabilities. Hence, the NAV of a mutual fund scheme is the total value of its holdings net of admissible expenses. i.e.,

NAV of a mutual fund = (Value of assets – value of liabilities)/Number of outstanding units or shares

Where Assets may include:

  • The market value of MF Scheme investments (stocks, bonds etc.) i.e. the closing price on the stock exchange where these are listed.
  • Cash
  • Any receivables & liquid assets
  • Accrued Dividends (on stocks) & interest income (on debt securities) etc.

and, Liabilities may include:

  • Capital provided by the unit-holders.
  • Scheme related Expenses which are accrued (also known as ‘Expense Ratio’.)

For instance, if a fund’s assets are valued at ₹5crores and it has liabilities of ₹60lakhs, then the net book value of the fund would be ₹4.40crores. If there are 5 lakh outstanding shares in the fund on a given day, then the NAV for the day would be ₹88.

It is worth noting that, This NAV could change on a day-to-day basis depending on the change in assets and liabilities, the number of shares, and the price of the shares in the market. For this reason, NAVs are published by most mutual funds at the end of every trading day, after the market closes.

Now here are a few ways how NAV can be helpful for the investors to analyze, before investing in mutual funds:

  • NAV can help the investor in calculating the number of units that an investor can buy in a particular scheme.
  • NAV also helps in calculating redemption amount (liquidation value) and profit on of an investment.
  • It helps in knowing the general fund performance over a span of time.
  • It also helps to ascertain the annualized growth of a scheme.

However, NAV is not a key indicator of the performance of a fund – it is merely an indicative number of the value of the fund.

 Some popular Myths:

Many of us believe that a higher NAV means that a particular scheme is more expensive than a fund with lower NAV. A higher NAV fund means you get lesser number of units, hence low profits. But it is not true.

In order to assess the profits of a mutual fund, you need to look at the returns of the fund. The higher the returns, the greater your gains. These returns may differ from month-to-month depending on the market trends. It also depends on the kind of mutual fund you hold – debt funds, for instance, may give you lower returns in the short-term than a moderate-to-high-risk equity fund.

Let us take an example to understand it better-

Suppose, you made an investment equal amount of ₹1 lakh each into two schemes A and B. Scheme A has a NAV of ₹10 whereas Scheme B has a NAV of ₹50. Scheme A would come across as a cheaper buy because you got 10,000 units as against 2,000 units in Scheme B. Now, both the schemes return 10 percent in a month. The new NAV scheme A is ₹11 and that of Scheme B is ₹55.

This implies that the value of your investment in both the cases is ₹1,10,000. Therefore, we see that the NAV of a scheme is irrelevant, as far as generating returns are concerned. The only difference is, in the case of Scheme A, the investor gets the number of units and in Scheme B, he gets lesser number of units. For two schemes with identical portfolio and other things remaining constant, the difference in NAV will hardly matter as long as the schemes deliver the same returns.

Some investors also confuse the market price of an equity share and the NAV of the mutual fund. Although, it is completely wrong.

Market Price of an equity share is the one which is quoted on the stock exchange, determined largely by the demand-supply scenario. It changes throughout the day.

On the other hand, NAV is the book value of the units, updated at the end of the trading day, do not change all through the day. There lies no concept of the market value of a mutual fund unit.

Varun Baid

Varun Baid

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About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

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