What Is NAV In Mutual Funds?

You must have come across the term ‘NAV’ in Mutual Funds. We often find this term in our mutual fund portfolio or when exploring new funds to invest in. In simple terms, it is the per-unit price of a mutual fund. In this article, let’s understand what Net Asset Value or NAV means, how it is calculated, and its importance in the world of mutual funds.

What Does NAV (Net Asset Value) Mean In Mutual Funds?

The full form of NAV is Net Asset Value. It is the price at which each mutual fund unit is bought and sold. So, if a fund has a NAV of say ₹10 and you want to invest ₹10,000, you will get 1000 units (10,000/10) of that mutual fund.

Let’s understand the concept of this term thoroughly with an example:

We know that a mutual fund pools money from multiple investors and then invests their money in stocks or debt, depending on the type of the fund.  Let’s take the example of an equity mutual fund whose NAV is ₹10. Say you invested ₹55,000 in this fund. Along with you, 9 other investors invested the following amount:

Based on their investment, the mutual fund allocated units of the fund to every investor. These units were allocated based on the NAV, which was ₹10. That means:

• You get 5,500 units for your ₹55,000 (₹55,000/₹10).
• Another investor who puts ₹1,00,000 will get 10,000 units

How Does The Value Of NAV Change?

Once all investors contribute their money, the fund manager gets a total corpus, like in the example above, ₹6,25,000. The fund manager now decides how to allocate this amount across different stocks. The exact allocation and stock selection depend on their professional expertise and the fund’s investment strategy.

Let’s assume the fund manager distributes the corpus across 10 different stocks. The value of these stocks changes daily based on market conditions. Here’s how the value of the portfolio looked on Day 1 and after 5 days:

In five days, the total investment grew from ₹6,25,000 to ₹6,35,030, reflecting a 1.60% increase.

Since NAV is directly linked to the fund’s value, the new NAV is calculated as:

New NAV=10×(1+1.60%) =  10.16%

This is how NAV changes. It moves up or down depending on how the underlying investments perform. So when you invest in a mutual fund, units are allocated based on that day’s NAV. Similarly, when you redeem your investment, the amount you receive depends on the NAV on the day of withdrawal

What Is The Net Asset Value Formula?

Net Asset Value (NAV) represents the per-unit price of a mutual fund. It is calculated using the formula:

NAV =  (Total Assets - Total Liabilities)/Total Outstanding Units

Where:

• Total Assets: Includes stocks, bonds, cash, and receivables
• Total Liabilities: Includes fees, expenses, and payables
• Outstanding Units: Total mutual fund units held by all investors

How Is NAV Calculated In Mutual Funds?

The Net Asset Value of a fund is calculated every day after the stock market closes at 3:30 pm. The fund houses calculate the day’s asset and liabilities valuation to arrive at the net valuation.

This NAV decides the per-unit price at which investors will purchase or withdraw their mutual fund investment. Net Asset Value fluctuates depending on how the underlying asset (Stock or debt) moves. If they rise, NAV rises. If they fall, NAV declines.

Is Expense Ratio Included in NAV?

Yes, the expense ratio is already factored into the NAV. It’s not charged to you separately. Let’s understand how:

Suppose the fund size is ₹100 crore and the expense ratio is 1%. This means the fund house will charge ₹1 crore in expenses annually. Instead of charging this directly to you, this amount is adjusted before the NAV is calculated.

Here’s how it works:

• Total annual charge = ₹1 crore
• Daily deduction = ₹1 crore / 365 = ₹27,397
• This daily amount is reduced from the fund’s total assets before declaring the NAV.

So, if you’ve invested ₹1,00,000 in this fund:

• Annual expense = ₹1,000 (1% of your investment)
• Daily deduction = ₹2.74 
• This ₹2.74 is already reflected in the NAV, so when you check your returns, they’re after expenses.

That’s why you don’t see the expense ratio being deducted from your account, since it’s already adjusted in the NAV.

Now, let’s see how this impacts an individual investor. 

Suppose you invest ₹1,00,000 in this fund. Since the expense ratio is 1%, your total annual charge would be ₹1,000 (1% of ₹1,00,000). But just like at the fund level, this charge is deducted daily. So, on a per-day basis, ₹1,000 ÷ 365 = ₹2.74 is deducted from your investment.

For example, let’s say that after 10 days, your investment has grown to ₹1,00,250. However, after deducting the daily expense of ₹2.74, the amount reflected in your portfolio would be ₹1,00,247.26.

This daily deduction continues as long as you stay invested, but since the NAV itself is adjusted after expenses, investors don’t need to manually subtract these charges; they are already factored into the price at which units are bought and sold.

What Is The Importance Of NAV In Mutual Funds For An Investor?

The NAV of a mutual fund is a reflection of how a mutual fund performs. It is one of the most important metrics that investors consider when investing in a mutual fund. Below is the importance of NAV in a mutual fund:

1. Performance 

The NAV of a mutual fund tells you how the fund has performed over a period of time. If the underlying asset of the fund has grown, the NAV rises. On the other hand, if the underlying asset of the fund falls, the NAV declines.

2. Fund Valuation

NAV indicates how much the fund is valued. When you invest in a mutual fund, units are allocated to you on the basis of the NAV. For example, if the NAV is ₹10 per unit and you invest ₹50,000, you will get 5,000 units of the fund.

3. Fund Comparison

The growth of the NAV tells you the performance of the fund. It can be used as a metric to compare and measure the performance of other funds. However, it is to note NAV is not supposed to be looked at in isolation. Moreover, higher NAV does not suggest the fund is better.

How Does NAV Change Impact Mutual Fund Returns?

The Net Asset Value of your fund directly represents how the fund changes day on day. Here’s how the NAV changes reflect on your mutual fund returns in different scenarios:

If NAV declines

When a mutual fund's NAV increases over time, it generally indicates that the value of the underlying assets has grown. Capital appreciation is reflected in the increase in the NAV, meaning that as an investor, your investment has increased.

If NAV rises

If the NAV decreases, it usually signals that the fund's underlying assets have lost value. A drop in NAV indicates a capital loss, meaning the value of your investment has decreased.

How Does NAV Affect Lump Sum vs. SIP Investments?

When you make a lump sum investment, you invest a large amount all at once. The number of units you receive is based on the NAV on the day of your investment.

With SIP, you invest a fixed amount regularly rather than in a lump sum. Each SIP instalment buys units at the prevailing NAV on the date of the transaction.

This is where the benefit of rupee cost averaging comes in. You buy more units when the NAV is low and fewer units when the NAV is high, averaging the cost over time. This strategy reduces the impact of short-term market volatility.

Role Of NAV In The Performance Of A Fund

The history of a mutual fund’s NAV helps you understand how the fund has evolved over time in terms of investor participation and AUM (Assets Under Management). However, it does not reflect the actual returns the fund has generated.

As we saw in the earlier example, NAV changes for two main reasons:

• Fluctuations in the prices of the underlying stocks, and
• Changes in investor participation (more investors joining increases the AUM).

If stock prices go up or down, the NAV will follow. Similarly, if more investors invest in the fund, the AUM grows, but this doesn’t mean the fund has performed better in terms of returns.

So while NAV tells you the current value per unit, it doesn’t say how much wealth the fund has created over time. For that, investors should look at the fund’s return percentage over different periods (1Y, 3Y, 5Y, etc.), not just the change in NAV.

NAV Of Close-Ended vs Open-Ended Funds 

In the NAV of an open-ended fund, investors can enter and exit anytime on that day’s net asset value. Since such funds have constant investor participation, the AUM and, in turn, the NAV keep fluctuating. However, in the case of a closed-end mutual fund, investors can only invest until the offer period closes. After which units of a close-ended fund are traded like shares and their market price change but can differ from the NAV of the fund.

Should you invest in a mutual fund with a high NAV?

No, you should not pick a fund based on how high the NAV is. A high NAV doesn’t mean the fund is expensive, and a low NAV doesn’t make it cheap. NAV simply reflects the per-unit market value of the fund’s total assets. So, rather than focusing on NAV, look at:

• The fund’s underlying portfolio
• Performance history
• Fund manager’s strategy
• Expense ratio

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Disclaimer:

This blog is for general/educational information purposes and is no way to be considered as advice, or recommendation for investment or otherwise. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Tracking services are not exchange traded product. INDstocks is merely acting as a distributor of Mutual Funds. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948, BSE RA Enlistment No. 6428.