How To Calculate the NAV Of a Mutual Fund
Mutual funds pool money from investors and reinvest it in the securities market. The Net Asset Value (NAV) represents the per-unit market value of all securities held by a mutual fund scheme. When you invest in a mutual fund, the fund assigns units based on your investment amount. Understanding NAV is crucial for making informed investment decisions, as misconceptions about it can lead to poor choices. Read on to find out how to calculate the NAV of a mutual fund and more.
(Read more: What is a mutual fund?)
The Role of NAV in the Performance of a Fund
A majority of investors think that an asset's stock price and net worth are the same. As a result, people frequently believe that funds with smaller net asset values are more affordable and, thus, better investments. The determination of net asset value, however, is unrelated to the performance of the fund. The mere fact that a fund has a smaller net value does not imply that it is a thorough investment.
An asset's net worth only serves as an indicator of how the underlying assets have fared in prior years. So as an investor, you shouldn't use just that as a criterion when selecting funds to invest in. To make an informed choice, they should look at the returns on their assets.
Hence, the net worth of an asset is helpful when trying to understand how a fund operates on a daily basis. It makes no mention of how profitable a fund is. As an investor, you should thus research the past success of the asset as well as the current cost of funds before making a decision to invest.
(Read more: What is NAV?)
When Is NAV Calculated?
Commonly, NAV is used to compute the price per share of a mutual fund or ETF. On the basis of the closing market values of the securities in the portfolio, NAV is determined at the conclusion of each trading day. The process for determining the net value is quite straightforward. Using the formula below, you can achieve it with ease.
Total outstanding shares / (Total Asset - Total Liabilities) = An Asset's Net Value
Yes
NAV on the same day
Yes
NAV of the following business day on which Stamping was completed before the deadline.
No
NAV of the business day after the receipt of the money by the mutual fund before the deadline
| Type of Transaction | Transaction received ahead of the deadline | Money received by the MF prior to the deadline |mobile_headre | NAV applicable |mboile_header |
|---|---|---|---|
Purchase or SIP Instalment | Yes | Yes | NAV on the same day |
- | No | Yes | NAV of the following business day on which Stamping was completed before the deadline. |
- | Yes | No | NAV of the business day after the receipt of the money by the mutual fund before the deadline |
To Perform Inter-Scheme Switching
| Type of Transaction | Transaction received ahead of the deadline |mobilr_header | Money received by the MF prior to the deadline | NAV applicable |
|---|---|---|---|
Switch out | Yes | — | NAV Same Day |
Switch in | — | Yes | This must be in accordance with the redemption payout of the Switch-out plan, and in the case of the Switch-in scheme, it must be done before the cut-off time. NAV of the business day on which the funds are received. |
Calculate NAV
We calculate the NAV of a mutual fund by dividing the total net assets by the total number of units issued. To get the total net assets of a fund, subtract any liabilities from the current value of the mutual fund’s assets and then divide the figure by the total number of units outstanding. The resulting figure is the NAV of the mutual fund. So, the mathematical formula for NAV is:
Assets – Debits / Number of outstanding units = Net asset value (NAV)
The NAV of a mutual fund is always calculated at the end of the market day. This is because the market value of securities changes on a daily basis. Hence, the NAV of a mutual fund also changes daily.
Example 1
Suppose the market value of the securities of a mutual fund scheme is ₹500 lakh. The mutual fund issues 10 lakh units of ₹10 each to its investors. So, the NAV per unit of the fund is ₹50.
Misconceptions about NAV
Many investors misunderstand how NAV works. As a result, they make poor investment choices. If you are a mutual fund investor, get a clear picture of how NAV is linked to fund performance. Steer clear of the common misconceptions that are listed below:
Misconception #1: Schemes with low NAVs fall cheaper
Suppose you invest the same amount in two mutual fund schemes that have identical portfolios. The scheme with the lower NAV will fetch you more mutual fund units. But this does not mean that it is cheaper.
Let’s consider a very simple example. Say, you invest ₹1,000 each in two schemes. Scheme 1 has an NAV of ₹10, getting you 100 units. Scheme 2 has an NAV of ₹100, which fetches you 10 units. Both schemes have the same underlying asset portfolio, which gains by 20%. Let’s look at what this means for your investments:
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The NAV of Scheme 1 increases by 20% to ₹12. That means the value of your investment grows to ₹1,200 (i.e. ₹12 x 100 units).
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Following the 20% appreciation, Scheme 2 now has an NAV of ₹120. As a result, your investment value increases to ₹1,200 (i.e. ₹120 x 10 units).
As you can see, getting more units may not always result in higher returns. So, the NAV is not an effective measure of whether a fund is cheap or expensive.
Misconception #2: Funds with higher NAVs are better investments
The example above shows that whether the NAV is high or low is irrelevant. If two mutual funds have the same portfolio, they will generate the same returns.
The NAV on any given day will not offer any hints about the growth prospect of a mutual fund. Instead, you must study the fund’s NAV in the recent past. Comparing these figures may help you assess how a fund might perform going forward.
Misconception #3: Book profits when the NAV rises
Do not confuse the NAV of a mutual fund with the price of a share. A share trader collects profits by selling shares when their price rises. But that is not how mutual funds work.
By redeeming fund units when the NAV increases, you might exit an investment with good longer-term prospects. And you might continue holding on to fund units whose NAVs are declining or stagnant. Rather than focus on the NAV, study the fund’s performance before redeeming any units. If a fund is performing well, it may be a good idea to stay invested.
Misconception #4: NAV changes directly reflect a fund manager's skill
A common misconception is that fluctuations in a mutual fund's NAV directly indicate the skill or performance of a fund manager. While the fund manager's decisions do impact the fund's performance, NAV changes are primarily driven by market conditions and the performance of the underlying assets. External factors such as economic shifts, interest rate changes, and geopolitical events can significantly influence NAV, independent of the manager's actions. Therefore, it is essential to evaluate a fund manager's skill by considering the fund's strategy, risk management, and performance relative to its benchmark and peers, rather than relying solely on NAV changes.
How Does a High or Low NAV Matter?
Some distributors promote new fund offers by highlighting their low NAV. They lead investors to believe that buying a mutual fund with a low NAV means getting a good deal. Again, this is because some investors mistakenly equate the NAV of a mutual fund with the price of a company’s stock. A low stock price means that the stock is available at a bargain price. As mentioned, the same does not apply to a mutual fund’s NAV. You cannot judge how expensive or cheap a fund is by its NAV. The NAV simply tells you the current value per unit of a mutual fund scheme. A high NAV may only reflect the positive performance of a mutual fund scheme. It also indicates that the scheme has been around for a long time.
The NAV only affects the number of units you receive. A mutual fund scheme with a high NAV gives you fewer units, but the value of your investment remains the same. What matters is the performance of the mutual fund and the returns you get.
Example
Suppose you invest in two mutual fund schemes, X and Y. Scheme X has an NAV of ₹10 and Scheme Y has an NAV of ₹50. You make an investment of ₹1 lakh in both schemes. It may seem that Scheme X is cheaper because you get 10,000 mutual fund units, while Scheme Y gets you only 2,000 units. Now suppose both schemes give a return of 10% after a month. This means that the NAV of Scheme X is ₹11 and the NAV of Scheme Y is ₹55. For both schemes, your investment value is ₹1.1 lakh. The only difference here is that you get more units with Scheme X than with Scheme Y. So, the NAV of a mutual fund is irrelevant when it comes to the performance of the fund.
Where to Find the NAV of a Mutual Fund?
You can find the NAV of a mutual fund on the official website of the fund house, the Association of Mutual Funds in India (AMFI) website, or financial news portals. These platforms provide daily updates on the NAV of various mutual fund schemes, allowing investors to track their investments accurately.
Difference Between NAV and Stock Price
Many investors confuse the NAV of a mutual fund with the market price of a stock. So, when investing in mutual funds, they think that a lower NAV means a cheaper price and thus a better investment. Let us see why this is a wrong assumption.
When a company gets listed on the stock exchange, its shares become available for investors to buy. The cost of the company’s shares is mentioned on the stock exchange. That is the stock market price of its shares. Factors such as the demand–supply scenario and the company’s potential affect the price of its shares. So, the stock market price is different from its book value.
For mutual funds, there is no such thing as the market price of a unit. We buy mutual fund units at their book value. The NAV of a mutual fund is thus the book value of the unit. Hence, the market price of a company’s stock is very different from the NAV of a mutual fund.
Is NAV the Same as Book Value?
NAV and book value are related but distinct financial metrics. NAV is specific to mutual funds and represents the per-unit value of the fund's assets minus its liabilities, calculated daily. It indicates the current value of a mutual fund's holdings. Book value, on the other hand, is a broader term used for companies, representing the value of a company's total assets minus its total liabilities. While both provide insights into value, NAV pertains to mutual funds, whereas book value applies to companies.
Bottom Line
When investing in mutual funds, focusing solely on the NAV can be misleading. It's essential to evaluate the fund's overall performance rather than just it’s NAV. You should check the performance of the fund against key metrics, not its NAV. You can do this by looking at the returns the fund has generated over the years, considering factors like consistency, risk, and management quality.
What Next?
We are almost at the end. Before you start investing in mutual funds, there are a few more important points to keep in mind like taxation. This can affect your total financial returns. To know about these factors, click here.
FAQs
Visit the mutual fund's official website or utilize a financial news service that offers up-to-date NAV data to find out the Net Asset Value (NAV) of a certain mutual fund.
The market value of a mutual fund's underlying assets, such as stocks and bonds, has a major impact on the NAV. The NAV directly responds to changes in these asset prices, rising or falling in accordance.
The NAVs of mutual funds are normally updated once per day, usually in the evening, following the end of the trading day. Regulations for funds and markets may affect the precise updating time.
NAV, or "Net Asset Value," is the term used for stocks. The value of a company's net assets is calculated as the sum of its total assets minus its total liabilities, divided by the number of outstanding shares.
Divide the sum of the assets less the liabilities of a corporation by the total number of outstanding shares to obtain the Net Asset Value (NAV) per share. NAV per share is calculated as follows:
NAV per share = (Total Assets - Total Liabilities) / Outstanding Shares.
