Understanding Mutual Fund NAVAnd Its Calculation
What is net asset value (NAV)? Does this question confuse you? Well, you are not alone. Many investors find it baffling So what exactly is NAV, and how is it calculated? In this blog, we will tell you about various aspects of NAV
What is NAV?
NAV is the price per unit of a mutual fund scheme In other words, it is the value of one unit of the fund As mutual funds invest in multiple securities, whose market value changes daily, a fund’s NAV also changes.
How is NAV Calculated?
Now that you know about mutual fund net asset value let’s understand its calculation process NAV for mutual funds is arrived at by using this formula:
NAV = TotalAssets of the Mutual Fund – (Total Liabilities of the Mutual Fund + Expenses) / Number of Outstanding Units
Total assets of a mutual fund include its stocks, bonds, securities, etc, it holds Liabilities include the money the mutual fund needs to pay its investors at the time of redemption. Expenses refer to the cost that the fund house has to incur in the form of fund management
fees, office costs, branding fees, etc Outstanding units refer to the total number of units the fund house has allocated to its investors.
Let’s understand it with the help of an example Suppose the total assets of a mutual fund are ₹1 lakh Its total liabilities are ₹20,000 and expenses are ₹10,000 The fund’s outstanding units are 1000.As per the formula, the fund’s NAV would be (see image).
Note that NAV for mutual funds is calculated at the end of each day after the market closes and the fund house declares the same
Relevance of NAV forYou as an Investor
● Determines the Number of UnitsAllotted
Afund’s NAV determines the number of units allotted to you Suppose you invest ₹50,000 in a mutual fund whose NAV is 100 You will get 500 units of the fund If the NAV falls, you get more units, and vice versa. For example, if the NAV comes down to 50, you will be allotted 1,000 units (50,000/50) If the NAV rises to 200, you will get 250 units (50,000/200)
● DeterminesYour Investment’s Value
As NAV fluctuates every day, so does the value of your investment. For instance, suppose you invest ₹ 50,000 in a fund whose NAV is 100 You will get 500 units of the fund (50,000/100) If the fund’s NAV increases from 100 to 150, your investment value would be ₹75,000 (500 x 150)
Suppose next month, the fund’s NAV drops to 80, then the value of your investment comes down to ₹40,000 (500 x 80) Thus, your mutual fund’s investment value is directly proportional to its NAV (see image).
Does Lower NAV Mean a Better Fund?
While NAV determines the number of mutual funds units allotted and your investment value, it’s a myth that a fund with a lower NAV means better returns While NAV may indicate where a fund is moving, a lower NAV doesn’t necessarily mean a better fund (see image).
What’s essential is to look at the fund’s fundamentals and ensure it aligns with your objectives and risk tolerance Equally crucial is to analyze the fund’s long-term track record and invest in a fund that has consistently performed well in the long run.
Looking at a fund’s expense ratio, past performance, and track record of the fund manager is far more critical when picking up a fund for investment
Takeaway
Note that mutual fund net asset value has got nothing to do with a fund’s performance. However, a fund’s NAV changes as per the value of its underlying assets.
While NAV for mutual funds is a parameter you should look for while investing in a mutual fund, it’s not everything.As an investor, what matters is your fund’s NAV on the date of redemption Ahigh NAV on redemption translates into higher investment value
Also, just because a fund’s NAV has taken a beating doesn’t mean you should sell it A mutual fund’s true value lies in the intrinsic value of its underlying securities.
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Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs Readers should seek independent professional advice before making any investment decision based on the information provided on this website
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