Net Asset Value (NAV) Of Mutual Funds: Its Role In Fund Performance

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. 

What is Net Asset Value?

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:

• Markets performance
• Investors buying/selling the units
• The fund’s administrative costs or dividend payouts

Let’s take 2 examples to understand this better. 

• Example 1

Suppose a Nifty 50 index fund has assets under management worth Rs. 80 crores with a NAV of Rs. 10. It gains Rs. 20 crores on its investments as the benchmark, Nifty 50, performs well. Accordingly, its current value increases from Rs. 80 crores to Rs. 100 crores. in that case, the NAV will move up to Rs. 12.5 from Rs. 10, offering profits of Rs. 2.5 apiece. 

• Example 2

Let’s say the net assets of the above-stated mutual fund were reduced by Rs. 5 crores due to redemptions. Then the value of the assets will be down to Rs. 75 crores from Rs. 80 crores, lowering the NAV from Rs. 10 to Rs. 9.375. 

But, is NAV in mutual funds important for investors? It surely is and the following section discusses this aspect.

Also read: What is the expense ratio in mutual funds & how it’s is calculated?

NAV’s Importance to Investors

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. 

Also Read: Difference between SIP And Mutual Funds

Difference between Net Asset Value and Market Price

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. 

1. One can buy and sell shares of listed companies on stock exchanges. Their market prices change due to a constant tug in demand and supply.  
2. However, the same does not apply to mutual funds as such units are not listed. Instead, investors purchase mutual fund units premised on a scheme’s net asset value, calculated based on the underlying securities’ closing prices. 

To gauge the performance of mutual funds, it’s crucial for investors to understand the impact of investment timing on NAV.

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. 

How is Net Asset Value Calculated?

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: 

• 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

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. 

Also read: Top 10 DEMAT accounts in India in 2022

NAV’s Role in Mutual Fund Performance 

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.  

Final Word

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.         

For instance, Navi Nifty 50 Index Fund has the lowest expense ratio* of 0.06% and has an experienced fund manager with a proven track record. To invest in our mutual fund, visit Navi Mutual Fund

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

*t&c applied

FAQs on NAV in Mutual Funds  

Glossary

Equity funds: This type of mutual fund predominantly invests in shares of different companies.

Debt funds: Such a mutual fund invests in various debt instruments such as government and corporate bonds, treasury bills, and commercial papers.

Liquid funds: It is a subcategory of debt mutual funds that invest in debt securities with a maturity period of 91 days.

Overnight funds: Another subtype of debt mutual fund investing solely in instruments with a maturity period of 1 day. 

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