NAV- What is Net Asset Value, Types, Formula & Calculation

If you're investing in mutual funds, one thing you should consider, along with the fund performance and your risk tolerance, is the price of the mutual fund units. Much like product prices, the price of a mutual fund unit or the mutual fund's Net Asset Value (NAV) gives you important clues about the fund's worth in the market.

Looking for more information about NAV? We've got you covered. Read the blog to learn all about NAV meaning in mutual funds, its working, calculation, and importance.

What is NAV?

NAV refers to the price per unit of a mutual fund scheme. Put another way; it is the price at which investors buy or sell mutual fund units. For example, if you want to invest Rs. 5,000 in a mutual fund with a NAV of Rs. 100, you can buy 50 mutual fund units.

Now the NAV, meaning Net Asset Value isn't static. It changes according to the market conditions. This means the NAV of your mutual fund could increase or decrease. Naturally, the value of your investments will increase correspondingly as well. Here's a table to show how NAV can change the value of your fund.

Now, it's clear that NAV can impact the fund's value.

How does NAV Work?

Net Asset Value (NAV) represents the per-unit price of a mutual fund. It’s calculated by dividing the total value of the fund's assets by the number of outstanding units. NAV is determined at the end of each trading day and reflects the current market value of the fund's holdings.

How NAV is calculated?

The NAV indicates the performance of the mutual fund scheme. It is linked to the value of securities. Naturally, since the value of securities in the market changes daily, and the NAV also gets updated daily. A mutual fund calculates the NAV by factoring in its assets, expenses, liabilities, and outstanding units after the market closes for the day.

NAV formula

NAV= [Assets - Expenses (and/or liabilities)] / Number of outstanding units

The calculation of mutual funds relies on the trading method employed and primarily depends on various assets and liabilities. This means entering the right values is crucial to determine the NAV. Here's how you can be assured you're entering the right values.

1. How to calculate the value of the assets?

The closing prices of the securities held inside the fund's portfolio are used to compute this value at the end of each day. These securities or assets include the fund's investments, cash and cash equivalents, receivables, and any other income earned but not yet paid out.

Mutual funds incorporate items like dividends and interest payments in addition to holding a portion of their capital in liquid assets like cash. The fund's total assets include each of these items and their variants.

2. How to calculate the value of the liabilities?

The liabilities include outstanding payments, money owed to lenders, and fees owed to associated entities. Additionally, mutual funds may have foreign liabilities, such as shares held by non-residents or pending payments to foreign companies. Liabilities can also include accrued expenses like utilities, staff salaries, operating costs, distribution expenses, and management fees.

The NAV in mutual funds considers the magnitude of these liabilities and assets as of the end of a specific day.

Note that you can also calculate the general Net Asset Value of individual assets. To do this, divide the price of the asset’s equity share by the cumulative cost of the individual share.

How investment timing affects NAV

Essentially, mutual funds calculate the NAV after the market hours each day. So, if your application for a mutual fund subscription or redemption arrives before the end of the market hours, the NAV for that day gets applied. Suppose you send your application after the closing time, the NAV of the next day gets applied to it. Note this isn't applicable for liquid and overnight funds with schemes greater than Rs. 2 lakhs.

The role of NAV in assessing fund performance

If you consider NAV as an indicator of its stock price and believe that funds with a lower NAV are more affordable and potentially more advantageous investments, that’s not the case. The NAV calculation does not directly indicate a fund's performance. Just because a fund has a lower NAV does not necessarily mean it is a good investment.

For example- if you invest in two funds, one with NAV of Rs 100 and the other with Rs 10. Your value of the investment after a year might look like this-

Here, the value of your investment stayed the same in both schemes when they both grew at the same rate.

We'll re-iterate.

The NAV can give you insights into the performance of the mutual fund scheme and help you track its growth. By watching the NAV, you can understand how the scheme has evolved and make informed investment decisions.

That said, don't rely solely on a fund's NAV to make investment decisions. Instead, compare factors like a fund's performance against its peers, and the returns it brings over the long term, among other things, to make well-rounded investment decisions.

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Frequently Asked Questions

How to calculate the NAV of mutual funds?

To calculate the net asset value of a mutual fund, use the formula:

NAV = Total Assets − Total Liabilities/Total Outstanding Units

​This value is computed daily by the fund house after deducting all expenses and liabilities from the total asset value and dividing by the number of outstanding units.

How to check the NAV of mutual funds?

The NAV can be found on the respective fund house's website and the AMFI website. These websites update the NAV daily after the market closes, reflecting the current value of the mutual fund units.

What affects the NAV of a mutual fund?

The NAV of a mutual fund is affected by changes in the market value of the fund's underlying assets, expenses incurred, and any income earned (such as dividends or interest). External factors like market performance, economic conditions, and interest rates also influence NAV.

Is higher NAV better or lower?

Higher or lower NAV does not indicate the quality or performance of a mutual fund. NAV merely reflects the per-unit value of the fund. Investors should instead focus on the fund's historical returns and expense ratio for a better investment decision.