What is Mutual fund Net Asset value (NAV)

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What is Mutual fund NAV

Mutual fund Investor always remain puzzled about various financial terminologies. One such basic terminology which requires a proper understanding by investor is Mutual Fund NAV. NAV is an abbreviation of Net Asset value, i.e. the value per unit of the mutual fund. It is one of the most important metrics to evaluate and compare between mutual funds. It is basically calculated as the value of asset less the values of liabilities per unit on a day.   

 The formula of NAV = (Value of Asset – Value of liabilities)/ Number of outstanding shares. 

An analogy can be made by relating to the stock market. The price of the share changes according to the performance of their asset. As most of the mutual fund AMC not necessarily invest all their funds. The sum of the current value of all their asset and cash is called an Asset under Management or (AUM). It changes on a day to day basis depending upon the change in assets, liabilities, the number of shares and prices of the share in the market. It is published by mutual fund at the end of the day.   


How to calculate NAV: 


NAV plays a key role in mutual fund Investing. It’s merely an indicative value of the fund which helps us in determining the state of the mutual fund on a given day. It provides information about indicative number of values of the fund.  It can be calculated as the total values of their asset divided by number of units. 

Suppose the market value of any mutual fund is 600 lakh and total shares is about 10 lakh units of Rs. 10 each. Then, the NAV per unit will be Rs. 60. 

Generally, NAV is not given as much importance but people in India really give importance to it. Any new fund will have a lower value than the older ones. A general conception in people’s mind is that lower net value is the best time to invest. But an investor should keep in mind that net asset value should not be the key criteria to judge a fund performance.  


Why investor should not give much importance to NAV  


Let’s try to understand it through an example. 

Suppose there are two mutual funds in the market. Both have the same portfolio except their asset value. Let the first one be mutual fund X has a NAV of Rs. 30 and second be mutual fund Y has a NAV value of RS. 60.  Now, let us consider both these funds have invested about 20% their funds in the company ABC. If the shares of the company rise about 10%, then the NAV of the fund will be increased by 2%. So, in that case, the NAV of MF- X will be 30.6 and that of MF-Y will be 61.2.  

Now one might think that MF-Y has provided greater return. But let’s do some analysis to know more about it.  

Let’s suppose if you have invested about Rs. 300 in the Mutual Fund X at Rs 30, then you have got 10 unit. If you have sold that unit at 30.6 then you would have got 30.6*10= 306. So, you have made a profit of RS 6. 

In case, if you have invested in the mutual fund Y the same amount of RS 300. Then you have got 5 unit. If you have sold that unit at a base price of 61.2 then you have a profit of 61.2*5 = 306. Now, again you have made a profit of 6. 

This is an illustration that no two mutual funds are same and higher NAV is a not good indicator of fund performance.  


Disclaimer: Mutual fund Investments are subject to market risks. Please read the scheme documents carefully before investing.

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