Namaskar, Today we are going to discuss one of the most basic topics for a beginner – NAV (Net Asset Value) in Mutual Funds.

We already discussed topics on Mutual Funds.

• Mutual Fund – What Is Mutual Fund? Definition, Benefits, Types & Details
• How to Buy Mutual Funds Online in India?
• 7 Best Mutual Fund Apps for Direct Investment Plan

Whenever you go market to buy some stuff you ask the price of the product, here the price of a mutual fund unit is called NAV.

What is NAV?

Net Asset Value (NAV) is the market value of a mutual fund unit. The overall cost of a mutual fund depends on this market value per fund unit. If you add up the market value of all the shares in the fund and divide it by the number of total mutual fund units, the resulting figure will be NAV.

NAV is simply the price per share of the fund. Just like shares have a share price, mutual funds have a net asset value. Generally, mutual fund units begin with a unit-cost of ₹10 and it rises as the fund’s assets under the AMC grows. So, a popular fund will have a higher net asset value than a less popular one.

How is NAV relevant to investors?

Most investors believe the net value of an asset is the same as its stock price. Thus, they tend to think that funds with a lower net asset value are cheaper and consequently better investments. However, the net asset value calculation does not correlate with the fund’s performance. Just because a fund has a lower net value does not make it a comprehensive investment.

The net value of an asset merely illustrates how the underlying assets have performed in the previous years. Therefore, investors should not make it a deciding parameter while choosing funds to invest in. They should check the returns from their investments to make an informed decision.

Thus, the net value of an asset is useful when it comes to understanding how a fund performs every day. It does not indicate how lucrative a fund is. Therefore, investors should check the current cost of funds and its historical performance before choosing to invest in it.

How is NAV calculated?

All mutual companies estimate their portfolio worth once the stock market closes at 3:30 p.m., each day. The market opens again the next day with the previous day’s closing share prices. The fund house deducts all the outstanding liabilities and expenses accordingly to calculate net asset value (NAV) of the day using the given formula.

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

• Assets– The asset section of mutual funds includes the cumulative market value of a particular fund’s investments, receivables, cash, cash equivalents and other accrued income. This market value is calculated at the end of each day, based on the closing price of the various securities included in the fund’s portfolio. These funds may include a percentage of capital in the form of liquid assets and cash as well as other items like interest payments, dividends, etc. The sum of all these assets mentioned above or their variants falls under the category of assets.

• Liabilities– The liabilities section, while computing net asset value mutual funds include outstanding payments, money owed to the lenders, and other fees and charges that are owed to associated entities.

Apart from these, mutual funds may also have foreign liabilities which can include shares for non-residents, payment pending to foreign conglomerates and various sale proceeds that are yet to be ousted.

Liabilities can also include various accrued expenses including utilities, staff salaries, operating expenses, distribution, management expenses, etc.

Thus, for net asset value calculation for mutual funds, the quantum of the above mentioned liabilities and assets as of the end of a particular day are taken into account.

You get the cost per unit on a daily basis when you divide total asset value by the number of mutual fund units issued so far.

So, that’s all for the basics of NAV – Net Asset Value. Will discuss more about personal finance in next blog.

In the meantime, if you need any help or have any doubts, feel free to comment below. I will be happy to help you.