What is NAV in Mutual Fund – Formula, and Calculation With Example
What is Net Asset Value in Mutual Fund?
NAV full form in mutual funds is Net Asset Value which refers to the market value of a fund’s assets less its liabilities. It represents the cost of purchasing or selling one unit of the fund to an investor. The total value of the fund’s assets is divided by the number of outstanding units to calculate the NAV. The NAV of a mutual fund fluctuates on a daily basis as the value of the underlying assets changes. NAV is used by investors to track the performance of their mutual fund investments, as well as to determine the fund’s entry and exit prices. The higher the NAV, the more expensive the mutual fund is to invest in.
In this blog, we look at the formula, calculation, and working of NAV in Mutual Fund. Let’s dive in!
NAV Formula
The NAV calculation formula is as follows:
- NAV = [Assets – (Liabilities + Expenses)] / Number of units outstanding
Where assets include the value of securities as well as liquid cash. Equity, debentures, bonds, bills of exchange, and commercial paper are among the securities in which the scheme has invested. It also includes the accumulated interest and dividends.
Money payable, interest payable, and fund management expenses are examples of liabilities and expenses.
NAV Calculation – How is NAV Calculated?
Fund houses value assets and liabilities at their closing prices, with the exceptions of cash at the bank, outstanding expenses, and other short and long-term liabilities.
Usually, a fund’s assets include:
- Stocks
- Cash and related instruments
- Gold
- Real estate
- Bonds or debentures
The liabilities and expenses of a fund comprise:
- Interest payable
- Fund management costs
- Debts to banks and other financial institutions
Here’s a NAV calculation example, for better understanding!
Suppose an index mutual fund scheme manages assets worth Rs. 100 crores and liabilities valued at Rs. 20 crores. Thus, the net value of the fund is Rs. 80 crores. If the fund issues 8 crore units, its NAV will come to Rs. 10.
Importance of NAV in Mutual Fund to Investor
Net Asset Value (NAV) is an important metric for mutual fund investors. It represents the fund’s per-unit value and provides a snapshot of the current value of its assets. NAV in Mutual Fund is used by investors to track the performance of their investments and changes in the fund’s value. It is also used to calculate the returns on mutual fund investments, which is an important factor for investors considering mutual funds. Furthermore, NAV assists investors in determining mutual fund entry and exit prices. A high NAV indicates that the mutual fund performed well, whereas a low NAV indicates that the mutual fund performed poorly. Finally, NAV is critical in assisting investors in making informed decisions about mutual fund investments.
Let’s understand this with an example!
Suppose you have bought 100 units of a scheme on July 22, 2021, with a NAV of Rs.10. If you sell it on July 22, 2022, when the NAV is Rs.15, you profit Rs.5 a piece. Accordingly, the total gains you realise will be Rs.500.
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What are the Factors that Affect the NAV of Mutual Funds?
Factors that determine the NAV of mutual funds include:
- Profits earned or losses booked from the underlying investments
- Mutual fund type
- Investor entry or exit
- Investor entry or exit
- Dividend payouts
What Does a Higher or Lower NAV Mean?
If the NAV of a fund is higher than yesterday’s NAV, investors can purchase fewer units of the scheme on the next day with the same amount. Suppose you invest Rs. 20000 in XYZ mutual fund with a NAV of Rs. 50. Accordingly, you would be allotted 400 units. In case the NAV surges to, let’s say, Rs. 54, you would receive approximately 370 units.
Difference Between Net Asset Value and Market Price
Although the NAV of a mutual fund and market price may appear similar, they are two entirely different concepts.
| Net Asset Value (NAV) | Market Price |
| Net Asset Value (NAV) is the per-unit value of a mutual fund’s assets minus liabilities. | The current market price at which mutual fund units are being bought or sold is termed as the Market Price. |
| Calculated at the end of each trading day | Varies throughout the trading day depending on market demand and supply |
| Used to assess a mutual fund’s performance | The underlying value of the mutual fund may not always be accurately reflected |
| Is the basis for mutual fund unit purchase and redemption prices | Factors such as investor sentiment and speculation can have an impact. |
| Provides a simple method for comparing the performance of various mutual funds. | It is not always a reliable indicator of a mutual fund’s long-term value. |
Impact of Investment Timing on NAV in Mutual Fund
There are cut-off times for mutual fund investments and redemptions. Their primary purpose is to decide on the net asset value to allot units or distribute gains. Simply, the allotment of units depends on when the application is submitted and when the fund house receives the investment amount. The cut-off times vary across different mutual fund schemes, namely, liquid, debt, and equity schemes.
Here’s a table to help you understand.
| Fund Type | Cut-off timings to buy | Cut-off timings to sell | When AMC receives the investment amount | Applicable Net Asset Value |
| Liquid Fund/Overnight Fund | 1:30 pm | 3 pm | Before the cut-off time | Previous day’s NAV |
| Liquid Fund/ Overnight Fund | 1:30 pm | 3 pm | After the cut-off time | Same day’s NAV |
| Equity Fund/ Debt Fund | 3 pm | 3 pm | Before the cut-off time | Same day’s NAV |
| Equity Fund/ Debt Fund | 3 pm | 3 pm | After the cut-off time | Next day’s NAV |
Let’s understand this with the help of an example.
Suppose, you invested in an index fund, a type of equity mutual fund, before 3 pm on July 28, 2021. On that date, let’s say its NAV stood at Rs. 15. If the amount reaches the fund house by 3 pm, units will be allocated based on the NAV of Rs. 15. However, if it reaches the fund house after 3 pm, you’ll be allotted units based on the next day’s NAV.
Role of Net Asset Value in the Performance of a Fund
Net Asset Value (NAV) is an important factor in determining mutual fund performance. Because the NAV of a mutual fund represents the fund’s per-unit value, it gives investors a clear indication of how the fund is performing. If the NAV of a mutual fund rises, it indicates that the underlying assets are performing well and the fund’s value is rising. If, on the other hand, the NAV of a mutual fund falls, it indicates that the fund is underperforming. NAV is used by investors to track the performance of their mutual fund investments, make informed investment decisions, and calculate investment returns.
Final Word
When planning to invest in mutual funds, it’s vital to know about Net Asset Value, which is the per-unit price of a scheme. Based on NAV in Mutual Fund, investors can receive and redeem units of a fund. Refer to the above guide for what NAV means and how it’s related to a scheme’s performance before taking a call. Consider other factors such as the expense ratio and experience of a fund manager before investing.
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Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
As per the Securities and Exchange Board of India (SEBI) regulations, all AMCs must update the NAV of mutual fund schemes by 9 pm every day.
NAV in mutual funds is the per-unit value of a fund calculated by subtracting the liabilities from the assets and dividing it by the outstanding units.
A good NAV is a high NAV which indicates good performance, but other factors such as fees, risk, and returns must also be considered.
A negative NAV in a mutual fund occurs when the fund’s liabilities exceed its assets. This can happen when there are significant losses or withdrawals, and it can lead to the fund being closed.
NAV is important in mutual funds because it gives investors the fund’s per-unit value, which allows them to track performance, calculate returns, and determine entry and exit prices.
A low NAV does not always indicate that it is a good time to buy a mutual fund; other factors such as fees, risk, and returns must also be considered.
When investing in mutual funds, you generally aim high and shoot low. This is why mutual funds with a high net asset value (NAV) have a bad reputation among investors. A fund with a high NAV is considered expensive, which is incorrect.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
