Posted On Wednesday, May 21, 2014

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NAV or Net Asset value is the price per unit of a scheme on a given date. It is the NAV of the fund that determines the number of units you will get when you invest in a particular scheme.

Many investors have misconceptions about the NAV of mutual funds and about how NAV is linked to a fund’s performance and its returns. Hence as an investor, it becomes very important for you to understand:
1. What is NAV?
2. How is it Calculated?
3. The Application of NAV

1. What is NAV in mutual funds?

Net Asset Value (NAV) in simple terms is the current worth of each unit of the mutual fund. NAV is the single most important number for a mutual fund scheme because all transactions of a fund are with reference to NAV.

NAV, which reflects the worth of each unit of a scheme, is computed and declared by mutual fund AMCs on all business days. Depending on the type of scheme NAV is calculated up to 2 or 4 decimal places.

2. How to calculate NAV?

On subtracting liabilities of a scheme from its total assets what remains is the net asset. Assets for a mutual fund scheme are the market value of securities in its portfolio and its cash balances. Liabilities refer to expenses the scheme must pay in the process of operations. Thus,

Net asset = Total assets - Liabilities

Net asset value is calculated by dividing net assets by the total number of units of a scheme. Units are added to the scheme when investors invest in the scheme and are reduced when investors redeem units. So you have:

Net asset value = (Total assets - Liabilities)/No of units

All three of the above variables viz total assets, liabilities and number of units can change in values daily and that’s the reason why a scheme’s NAV changes on a daily basis.

3. How to apply NAV to your mutual fund investment?

NAV is the price at which you would buy or redeem units of a mutual fund scheme on any given day. When you invest an amount in any mutual fund scheme you are actually buying a specific number of units of the fund at that day’s NAV. For example if the NAV is 25.00 and you’re investing Rs 25,000 then your mutual fund account would be allocated 1,000 units of the scheme. If after 5 years as you redeem your holdings the scheme’s NAV is 35 then the value of your investment would be Rs 35,000 (no of units x NAV).

Cut-off timings are followed based on SEBI guidelines as to which day’s NAV would be applicable for transactions, depending on the time of receiving applications. For applications in non-liquid funds received by 3 pm where the amount is less than Rs 2 lakhs the same day’s NAV is applied; for those received after 3 pm the following business day’s NAV is applied. The cut-off timing is different in case of liquid funds, kindly check FAQs on NAV applicability for more on this.

However mutual fund investors need to know more about how not to apply NAV as this happens to be an area prone to many misconceptions. The most common one is to assume that higher NAV always means superior performance. This might lead investors to wrongly believe that funds with higher NAV are better for them since they are earning higher returns, which could be far from the truth.

Technically it is from NAV that returns are calculated but this is done by comparing NAV of 2 dates to evaluate how much it has grown. Judging a fund by with only the latest NAV is like trying to measure the length of an object with just one reference point. In short NAV of a single date cannot give one much useful information about a scheme and should not be used as a criterion for choosing funds.

Hope this write up has provided better clarity on the most important number in mutual fund investing. Do take the assistance of a financial advisor for your major investment decisions.

Disclaimer, Statutory Details & Risk Factors:

Above article is authored by Quantum.

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