So, you plan to invest in mutual funds. You have chalked out the investment amount, researched the available options, and may have even selected one.
But before you begin investing, it’s essential to be familiar with the NAV(Net Asset Value of Mutual Fund), its calculation, and its significance in this respect.
Simply speaking, NAV or Net Asset Value of a mutual fund is the price at which investors buy and redeem units of a mutual fund. AMCs derive the NAV of mutual funds in the following manner: (Assets – Liabilities – Expenses) ÷ number of outstanding units.
The net asset value is subject to revisions every business day. AMCs evaluate a fund’s total assets under management at each day’s end and update the net asset value of the mutual fund accordingly. Thus, changes in the values of underlying assets and liabilities can increase or decrease a fund’s NAV.
A fund scheme’s NAV can change due to various reasons such as:
Let’s take 2 examples to understand this better:
But, is NAV in mutual funds important for investors? It surely is and the following section discusses this aspect.
NAV is relevant at the time of redeeming your investments. The capital gains you earn depend on a scheme’s net asset value on that particular day. (NAV at which you buy – NAV at which you sell) x number of units is what you earn or lose on a mutual fund investment.
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 apiece. Accordingly, the total gains you realise will be Rs.500.
Beyond this, however, mutual funds’ NAV is not that relevant to investors. Many mistake NAV as a basis to compare schemes. But, it hardly makes a difference unless the schemes are identical and the investment amount is consistent.
Nonetheless, it’s still vital to know the calculation of a mutual fund scheme’s net asset value. That way, you know how the potential market changes can pull or push your investment’s value.
Although NAV of mutual funds and market price may appear similar, they are two entirely different concepts. Accordingly, the assumption that investing in a scheme with a lower NAV will fare well is not true.
Let’s dive deeper to understand this better.
To gauge the performance of mutual funds, it’s crucial for investors to understand the impact of investment timing on NAV.
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||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 invest 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.
The formula for NAV is (Assets – Liabilities – Expenses) ÷ Number of outstanding units
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:
The liabilities and expenses of a fund comprise:
Let’s take an example to understand this calculation better.
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.
When deciding whether to purchase or redeem units in a mutual fund scheme, investors consider essential aspects like a fund’s expense ratio, fund manager experience, etc. That said movements in a scheme’s net asset value are vital as it shows how the underlying stocks and bonds have performed.
When planning to invest in mutual funds, it’s vital to know about NAV, which is the per-unit price of a scheme. Based on this, 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.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
Ans: Factors that determine the NAV of mutual funds include:
a) Profits earned or losses booked from the underlying investments
b) Mutual fund type
c) Investor entry or exit
d) Fund expenses
e) Dividend payouts
Ans: 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.
Ans: 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.
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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.
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