The Net Asset Value is the per share market value of a mutual fund scheme. It is obtained by dividing the difference between the firm's total assets and liabilities by the number of outstanding units in the fund.
Tata Floating Rate Fund Direct Quarterly Reinvestment of Income Distribution cum capital withdrawal NAV calculation:
NAV: (Assets - Liabilities)/ Total Number of Outstanding Units
It is a common misnomer that a low NAV implies a better investment. In fact, you would have come across several mutual fund schemes that promote their funds with a low NAV as “cheaper” compared to others. The NAV of a mutual fund is unlike the share price of a stock where stocks with lower values and high growth potential are considered lucrative. When we talk of NAV, it is essentially just the current book value of all the assets minus the liabilities of a particular scheme. The following example can help make things clearer:
Let’s say we have two funds namely, Fund A and Fund B.
The NAV of Fund A is Rs 10 and the NAV of Fund B is Rs 100.
Now, say you have Rs 10,000 to invest in the funds.
|Particulars||Fund A||Fund B|
|NAV||Rs 10||Rs 100|
|Units bought (with Rs 10K investment)||1000 units||100 units|
|NAV (increases by 50%)||Rs 15||Rs 150|
|Returs||Rs 15,000||Rs 15,000|
As you can observe from the above table, the returns (Rs 15,000) remain the same irrespective of the NAVs of the funds. Hence, the common notion that funds with higher NAVs give higher returns stands null and false as proved by the above example. Your main focus must be the total returns generated by the fund while making an investment decision. The total return (CAGR) for Tata Floating Rate Fund Direct Quarterly Reinvestment of Income Distribution cum capital withdrawal as on 29.09.2022 is 4.26.
Check Tata Floating Rate Fund Direct Quarterly Reinvestment of Income Distribution cum capital withdrawal to get a detailed description of the total returns.
In case, any company in your mutual fund portfolio distributes dividends. It is of the mutual fund’s discretion to distribute at a particular interval. But when they do, the NAV of your fund shall decrease reflecting a decline in the total corpus of the fund. On the other hand, there are funds that do not give dividends to shareholders but reinvest them in order to buy more units. As a result the total number of outstanding units of the fund increase which shall in turn decrease the NAV of the fund.
In the case of mutual funds of the growth plan category, no dividend is paid to investors. The entire dividend amount is reinvested by the fund in buying more assets to increase the long-term gains of the fund. In this case, the NAV does not decrease.
Profits/ Losses from the underlying assets: The NAV of a mutual fund simply reflects the profits and losses of the underlying assets that the mutual fund has invested in. When the assets increase in their value, the NAV increases and vice versa.
Expenses regarding the management of funds: Mutual funds as you would be aware are managed by professional managers who actively invest in various assets to generate good returns. The managers charge a certain fee for doing the same. These fees are reduced from the total NAV of the fund.
The number of investors who buy and sell units: If a large number of investors book their profits by selling units of the fund at higher NAVs, the NAV shall decrease (similar to profit booking seen in stocks). On the other hand, if investors buy mutual fund units at lower NAVs, due to the rise in the number of units, the NAV drops.
Type of mutual fund: Generally, a regular mutual fund has a higher NAV compared to a direct fund. A regular fund includes broker and intermediary fees whereas a direct fund has none.
Dividend Payouts: As we had explained above, when mutual funds pay dividends, it reduces the NAV as it is akin to withdrawing money from your own investment.
There are various factors that affect the NAV of a fund:
We have explained each of these points in the paragraph above.