What is NAV in Mutual Funds? : NAV Meaning, Full Form & More | INDmoney

While investing in mutual funds, investors are often at a loss on how to gauge the performance of a mutual fund. As mutual funds comprise a pool of securities instead of a single asset, the performance of a mutual fund cannot be estimated based on a single asset. The concept of Net Asset Value helps investors get information about mutual funds when combined with other factors such as past performance, risk factors, alpha, beta, etc.

What is NAV?

Net Asset Value (NAV) of a mutual fund denotes the per-share market value of a mutual fund. In other words, NAV is calculated as the net current value of total assets in a mutual fund after deducting the total value of all liabilities, if any, which is then divided by the total number of outstanding units in the fund. It varies on a per-day basis and is declared at the end of a trading day. Understanding NAV meaning in mutual funds tells us how much one share of the fund is worth.

To understand the role of NAV in mutual funds, it is also essential to know how it is different from per unit share prices. The per-unit share prices depend on the demand and supply and constantly change during trading hours, while the NAV of a mutual fund means the average closing market prices of all assets in the mutual fund.

Importance of NAV in Mutual Funds

NAV of mutual funds is commonly used while buying or redeeming units rather than to determine the fund's performance. Rather than showing the market performance of mutual funds, NAV is impacted by the changes in the values of its underlying assets. However, the growth or decline of NAV over time may be considered one of the indicators of a fund's performance. Since NAV is declared by fund houses daily, it demonstrates the daily fluctuations in the value of underlying assets, which plays a vital role in determining the price at which units can be bought or redeemed.

NAV Calculation

• NAV of a mutual fund is the price to be paid for the mutual fund scheme units. If you invest Rs 50,000 in a mutual fund with a net asset value of Rs 500, you can purchase 100 units of the mutual fund.
• NAV of a mutual fund is calculated at the end of each trading day with this formula:

Net Asset Value = [Assets in the mutual fund – (Liabilities + Expenses)] / Number of outstanding units in the mutual fund

• All liabilities and expenses of managing the fund are deducted from the combined value of cash and securities in a mutual fund's portfolio. The net asset is then divided by the total number of outstanding units.

NAV and Mutual Fund Performance

Comparing the NAV of mutual funds is not the best indicator of the performance of mutual funds. Often, investors are misguided into thinking that low NAV in mutual funds means it is a cheaper and better investment. In truth, the appreciation in NAV of mutual funds is a more critical factor to be considered an indicator than only NAV itself. Many other important factors have relevance to profitability related to investment in a mutual fund.

Selecting two mutual funds at random, let us try to gauge whether only considering NAV in mutual funds would give an appropriate performance measure. The table below shows the current NAV as well as returns of the two selected funds:

Even though the current NAV of ABC is considerably higher than the NAV of XYZ, the former's annual returns are much higher. If an investor selects a fund merely looking at the NAV and ignoring other factors like past performance, they may end up with a comparatively lower-performing fund. NAV gives a picture of how all underlying assets in a mutual fund performs daily.

What is a Good NAV for a Mutual Fund?

A low NAV means you get more units to invest in, and a high NAV means you get lesser units to invest in. However, it has no direct bearing on the performance of the fund. A mutual fund's performance must not be judged based on how high or low its NAV is.

Outlook

While investing in mutual funds, it is crucial to consider factors like returns, investment goals, risk preference, etc. NAV has an essential role in calculating how many units of a fund you will be allotted for a fixed amount of money. However, it is imperative to remember that a low NAV doesn't necessarily mean a good fund and similarly, a high NAV doesn't necessarily mean a poor performing fund. 

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FAQs

What is the full form of NAV?

Net Asset Value

What does the NAV of a mutual fund tell you?

It tells you the current value of one unit of the portfolio.

What is the NAV cut-off time?

Type of Schemes: Liquid Funds & Overnight Funds

• Subscription (including Switch-in from other schemes) - 1:30 p.m.
• Redemption (including Switch-in from other schemes) - 3:00 p.m.

All other schemes (Other than Liquid Funds/Overnight Funds)

• Subscription (including Switch-in from other schemes) - 3:00 p.m.
• Redemption (including Switch-in from other schemes) - 3:00 p.m.

What NAV will be applicable for redemption?

• Where the redemption transaction is received on any Business Day at official points of acceptance of transactions up to 3.00 p.m., NAV of the same Business Day shall be applicable.
• Where the transaction is received after 3.00 p.m., NAV of the next Business Day shall be applicable.