Mutual funds are among the most famous investment options for individuals looking to grow their wealth. However, understanding how mutual funds work, particularly in terms of Net Asset Value (NAV), is crucial for making informed investment decisions. NAV plays a significant role in determining the value of your investment in a mutual fund. This article provides a detailed examination of NAV, explaining its formula, the factors that influence it, and its impact on various types of mutual funds.
What is Net Asset Value (NAV) in Mutual Funds?
NAV, or Net Asset Value, is the per-unit price of a mutual fund. It represents the market value of the fund’s securities and assets, minus any liabilities or expenses, divided by the total number of outstanding units. In simpler terms, NAV is the price at which investors can buy or redeem units of a mutual fund. Since mutual funds pool funds from multiple investors to invest in stocks, bonds, and other securities, NAV helps assess the fund’s overall worth per unit.
The net asset value (NAV) of a mutual fund is computed at the end of each trading day, after the market closes. Mutual fund houses determine the NAV by considering the closing market prices of the securities in the portfolio, adding any accrued income, and deducting liabilities such as fund management fees and operational expenses. Since market conditions fluctuate daily, NAV ensures investors receive a transparent and accurate valuation of their investments.
NAV is a benchmark for tracking a mutual fund’s performance over time. However, a higher or lower NAV does not necessarily indicate whether a fund is expensive or cheap, as NAV fluctuates based on the market value of the underlying assets. Investors should use the Net Asset Value (NAV) to determine the value of their holdings, buy or redeem fund units at an NAV-based price, and compare the performance of different mutual funds. Evaluating past returns, fund manager expertise, and investment objectives is crucial when making investment decisions.
NAV Formula
The Net Asset Value (NAV) formula is essential for determining the per-unit value of a mutual fund. It provides investors with a clear picture of how the value of their investment changes over time.
NAV is calculated using the following approach:
- Total Assets comprise the market value of the fund’s securities, including stocks, bonds, and other investments. It also takes into account any accrued income, such as dividends and interest.
- Total Liabilities – These are the expenses and costs associated with managing the mutual fund, including fund management fees, administrative expenses, and operational costs.
- Outstanding Units – This refers to the total number of mutual fund units that investors currently hold.
NAV Formula in Simple Terms:
NAV per unit = (Total Assets – Total Liabilities) ÷ Total Outstanding Units
Since mutual fund prices fluctuate daily based on market conditions, NAV is recalculated at the end of each trading day. Investors use NAV to track the value of their fund and determine whether to buy, hold, or redeem their units. However, NAV alone does not choose a fund’s performance—it should be considered in conjunction with other factors, such as historical returns, portfolio composition, and the fund manager’s expertise.
Mutual Funds and NAV
NAV is not the same as a stock price. In the stock market, share prices fluctuate throughout the trading session due to real-time market demand and supply. However, in the case of mutual funds, the NAV is determined only once a day, after the market closes, by calculating the total market value of all fund assets, subtracting liabilities, and then dividing by the total number of units. This ensures that investors get a fair and transparent valuation of their holdings at the end of each trading day.
When investors buy or redeem mutual fund units, the transactions are executed based on the NAV of the applicable day. If an investor places a purchase or redemption request before the cut-off time set by the mutual fund house, they receive the NAV of the same day. However, the next business day’s NAV is applicable if the request is made after the cut-off time. This system prevents real-time speculation and aligns mutual fund investments with long-term financial planning rather than short-term trading strategies.
Since NAV reflects the total market value of the underlying securities, fluctuations in stock prices, interest rates, and other market factors can affect the NAV. However, a lower NAV does not necessarily mean a fund is cheaper or better, just as a higher NAV does not imply overvaluation. Investors should focus on the fund’s investment strategy, past performance, and overall suitability for their financial goals rather than making investment decisions based solely on NAV.
Closed-End vs. Open-End Funds NAV
Mutual funds can be broadly categorised into closed-end and open-end funds, and their NAV behaves differently based on their structure and trading mechanism. Understanding these differences helps investors choose the most suitable type of mutual fund for their financial objectives.
1. Open-End Funds NAV
Open-end funds are the most typical type of mutual fund, allowing investors to buy and sell units at any time. Their NAV is calculated daily based on the total market value of the fund’s assets, minus liabilities, divided by the number of outstanding units. Since these funds continuously issue and redeem units, the NAV determines the price at which investors buy or sell their holdings.
- Buying and Selling: Investors can purchase or redeem units at the day’s NAV, provided they place their request before the cut-off time.
- Liquidity: Since units can be redeemed at any time, liquidity is high, making them suitable for long-term investors who seek flexibility.
- Pricing: NAV represents the fair value of the fund, and there is no premium or discount to the NAV when shares are traded.
2. Closed-End Funds NAV
On the other hand, closed-end funds have a fixed number of units issued during the fund’s New Fund Offer (NFO) and are then traded on stock exchanges, similar to shares. The NAV is still calculated daily based on the total market value of the fund’s assets, but the trading price of a closed-end fund may differ from its NAV due to market supply and demand.
- Buying and Selling: Investors must buy and sell units on the stock exchange, where the price may be higher (premium) or lower (discount) than the net asset value (NAV).
- Liquidity: Since transactions happen in the secondary market, liquidity depends on trading volume.
- Pricing: Unlike open-end funds, the market price of a closed-end fund can deviate from its net asset value (NAV) due to factors such as investor sentiment, supply and demand dynamics, and market conditions.
Key Differences in NAV Calculation
| Feature | Open-End Funds | Closed-End Funds |
| Trading Mechanism | Directly with the fund house | Traded on stock exchanges |
| NAV Calculation | Daily, based on market value | Daily, but the price may trade at a premium/discount |
| Pricing for Investors | Transactions at NAV | Price depends on market forces |
| Liquidity | High (redeem anytime) | Depends on market demand |
| Suitability | Long-term investors prefer flexibility | Investors willing to trade like stocks |
Which One Should You Choose?
Open-end funds may be better if you prefer liquidity and easy investment access. However, closed-end funds could be considered if you are comfortable with market fluctuations and looking for opportunities to buy at a discount or sell at a premium. Understanding NAV in both fund types ensures informed investment decisions that align with your risk appetite and financial goals.
How is the Net Value of an Asset Calculated?
A mutual fund’s Net Asset Value (NAV) is calculated by determining the total value of its assets and subtracting its liabilities. This net value is divided by the number of outstanding units to get the per-unit NAV. Since mutual funds invest in various financial instruments, their net asset value (NAV) fluctuates daily based on market performance, accrued income, and expenses.
1. Components of NAV Calculation
To understand how NAV is calculated, let’s break it down into key components:
- Total Assets: This includes the current market value of all securities (such as stocks and bonds) in the fund’s portfolio, plus any cash reserves and accrued income, including dividends or interest earned.
- Total Liabilities cover fund management fees, administrative costs, operational expenses, and other obligations the fund owes.
- Outstanding Units: This refers to the total number of mutual fund units investors hold at any given time.
2. NAV Calculation Formula in Simple Terms
To calculate NAV per unit, the following formula is used:
NAV per unit = (Total Assets – Total Liabilities) ÷ Total Outstanding Units
For example, if a mutual fund has:
- Total Assets: ₹1,000 crore
- Total Liabilities: ₹50 crore
- Outstanding Units: 95 crore
Then,
NAV per unit = (₹1,000 crore – ₹50 crore) ÷ 95 crore
= ₹10 per unit
This means that investors buying or redeeming units on that day would do so at ₹10 per unit, excluding applicable charges such as exit loads.
3. Why NAV Changes Daily?
NAV fluctuates daily due to multiple factors:
- Market Movements: If the stock prices of companies in the mutual fund’s portfolio increase or decrease, the NAV will be impacted.
- Dividends and Interest Earned: Any income earned from dividends or bond interest increases the fund’s assets, raising NAV.
- Expenses and Fees: Mutual fund expenses, such as fund management fees and administrative costs, reduce the total asset value, resulting in a lower Net Asset Value (NAV).
Factors Affecting NAV
The Net Asset Value (NAV) of a mutual fund is influenced by several factors that impact the total value of the fund’s assets and liabilities. Since NAV is calculated daily based on market conditions, understanding these factors helps investors analyse how and why NAV fluctuates over time.
1. Market Movements
Since mutual funds invest in stocks, bonds, and other securities, market fluctuations have a significant impact on the NAV. The fund’s total asset value increases when stock prices rise, resulting in a higher Net Asset Value (NAV). Conversely, if stock prices fall, the NAV decreases.
- Example: If a mutual fund holds stocks of Company A, B, and C, and their share prices increase, the total value of the fund’s assets rises, pushing the NAV higher. If the stock prices drop, the NAV will decline accordingly.
2. Dividend and Interest Income
Mutual funds often receive dividends from the stocks they hold and interest payments from the bonds they hold. This additional income increases the total asset value, thereby positively affecting the Net Asset Value (NAV).
- Example: If a mutual fund earns ₹ five crore in dividends from its equity holdings and ₹3 crore in interest from its bond investments, its NAV will rise as its total assets increase.
3. Fund Expenses and Fees
Every mutual fund incurs operational costs, including fund management fees, administrative expenses, and marketing expenses. These expenses are deducted from the fund’s assets, reducing the NAV.
- Example: If a mutual fund has ₹500 crore in assets and incurs ₹10 crore in annual expenses, these costs will be reflected in the NAV accordingly.
4. New Investments and Redemptions
When investors purchase units of a mutual fund, the total assets under management (AUM) increase; however, since additional units are issued, the net asset value (NAV) does not change significantly. However, large-scale redemptions (investors selling units) may lead to asset sales, which can impact the net asset value (NAV) depending on market conditions.
- Example: If a mutual fund receives ₹100 crore in new investments, its asset size grows, but NAV remains stable unless the underlying asset values change significantly.
5. Capital Gains and Losses
If a mutual fund sells stocks or bonds at a profit, it generates capital gains, which increase the total asset value and boost the net asset value (NAV). Conversely, if the fund incurs losses on asset sales, NAV may decrease.
- Example: If a mutual fund sells a stock purchased at ₹500 per share for ₹700, the capital gain is added to the total assets, positively affecting the NAV.
6. Market Liquidity
Liquidity refers to how easily the securities in a mutual fund’s portfolio can be bought or sold without significantly impacting their prices. If a fund holds illiquid assets, sudden redemptions may force the fund manager to sell them at lower prices, which can negatively affect the net asset value (NAV).
- Example: A mutual fund heavily invested in small-cap stocks may see more significant NAV fluctuations due to lower liquidity.
7. Corporate Actions (Bonus, Stock Splits, Mergers)
Corporate actions, such as bonus issues, stock splits, and mergers, can impact the valuation of securities in a mutual fund’s portfolio, indirectly affecting the Net Asset Value (NAV).
- Example: If a company in the fund’s portfolio issues bonus shares, its stock price may adjust accordingly, which in turn affects NAV calculations.
NAV is not static—it changes daily due to market conditions, fund transactions, and operational expenses. While NAV movements are essential to track, investors should focus more on long-term returns, risk factors, and portfolio diversification rather than short-term NAV fluctuations when evaluating mutual funds.
Does a Lower NAV Mean a Cheaper Fund?
One of the most common misconceptions among mutual fund investors is that a fund with a lower net asset value (NAV) is a cheaper investment and, therefore, a better choice. However, this is not necessarily true. A mutual fund’s Net Asset Value (NAV) only represents the per-unit price of the fund’s underlying assets. It does not indicate whether a fund is expensive or cheap in terms of investment potential. Let’s break it down in detail.
1. NAV is Not Like a Stock Price
Many investors assume that a mutual fund’s net asset value (NAV) is similar to a stock price, where a lower price might indicate a bargain. However, unlike stocks, mutual funds do not trade on the stock exchange based on demand and supply. Instead, NAV is determined by the total value of the fund’s assets divided by the number of outstanding units.
- Example: Suppose two mutual funds have identical portfolios. Fund A has a NAV of ₹10, and Fund B has a NAV of ₹100. This difference arises because Fund A was launched recently, whereas Fund B has been in the market for a long time and has accumulated higher asset values. Despite the NAV difference, both funds offer the same investment potential.
2. NAV and Fund Performance
A lower NAV does not mean a higher return potential. A mutual fund’s future growth depends on the performance of its underlying securities, rather than the initial net asset value (NAV) at which an investor initially invests in the fund.
- Example: If an investor puts ₹10,000 into a fund with a NAV of ₹20, they receive 500 units (₹10,000 ÷ ₹20). If another investor puts ₹10,000 into a fund with a net asset value (NAV) of ₹100, they receive 100 units (₹10,000 ÷ ₹100). If both funds grow at the same rate (say 10%), their investment value increases equally, despite different NAVs.
3. Impact of New Fund Offers (NFOs)
Newly launched mutual funds start with a default NAV of ₹10. Some investors assume investing in a new fund at ₹10 is better than investing in an existing fund with a higher NAV. However, this is misleading because a fund’s growth depends on portfolio management and asset selection, not just NAV.
- Example: A newly launched mutual fund may have a NAV of ₹10 but might not perform as well as an existing fund with a NAV of ₹100 if the latter has a more experienced fund manager and a well-structured portfolio.
4. What Matters?
Instead of focusing on NAV, investors should evaluate:
✅ Fund Performance – Review the historical returns and consistency across various market cycles.
✅ Fund Manager Expertise – A skilled fund manager can maximise returns, regardless of NAV.
✅ Expense Ratio – Lower expenses mean more of your money is invested rather than used for fees.
✅ Portfolio Composition – The type of stocks or bonds the fund holds determines its future growth.
A lower NAV does not make a mutual fund a better or cheaper investment. Instead, investors should analyse a fund’s performance, risk level, and investment strategy before making a decision. Whether a fund has a NAV of ₹10 or ₹200, what truly matters is how efficiently it grows over time and whether it aligns with your financial goals.
NAV in Different Mutual Fund Types
The Net Asset Value (NAV) calculation remains the same across all mutual fund types, but its significance and interpretation can vary depending on the type of fund. Different mutual fund categories have unique investment strategies, liquidity structures, and risk-return profiles, which influence how the net asset value (NAV) changes over time.
1. Equity Mutual Funds
Equity funds primarily invest in stocks, and their net asset value (NAV) fluctuates daily in response to changes in the stock market.
- Since stock prices are highly volatile, the NAV can experience sharp fluctuations.
- The long-term growth of equity funds depends more on the performance of underlying stocks than short-term NAV changes.
- Investors should focus on historical returns, portfolio diversification, and fund management strategy, rather than relying solely on NAV.
2. Debt Mutual Funds
Debt funds invest in fixed-income securities, such as government bonds, corporate bonds, and money market instruments.
- Interest rate movements, credit quality, and duration risk influence their NAV.
- Unlike equity funds, NAV fluctuations in debt funds are relatively stable.
- A falling interest rate environment leads to an increase in bond prices, pushing NAV higher.
3. Hybrid Mutual Funds
Hybrid funds invest in a combination of equities and debt instruments to balance risk and return.
- Their NAV fluctuates based on the proportion of equity and debt holdings.
- Aggressive hybrid funds, with higher equity allocations, exhibit higher NAV fluctuations, while conservative hybrid funds, with higher debt allocations, have relatively stable NAVs.
4. Index Funds & Exchange-Traded Funds (ETFs)
These funds track a specific market index, such as the NIFTY 50 or Sensex, and their NAV is directly linked to the index’s performance.
- Index funds declare NAV at the end of the trading day, like traditional mutual funds.
- ETFs, however, trade on stock exchanges throughout the day, so their prices fluctuate in real-time.
- Due to demand-supply dynamics (tracking error), an ETF’s net asset value (NAV) may differ slightly from its market price.
5. Liquid & Overnight Funds
These funds invest in very short-term money market instruments, ensuring high liquidity and minimal risk.
- NAV fluctuations are minimal, as they primarily earn interest income.
- Since liquid funds settle on a T+1 basis (next-day settlement), NAV is crucial in determining returns.
6. Closed-Ended Mutual Funds
Unlike open-ended funds, close-ended funds have a fixed number of units and trade on stock exchanges.
- Their NAV is published daily; however, market prices may vary due to fluctuations in demand and supply.
- Investors buying or selling closed-end funds may pay a premium or receive a discount to the net asset value (NAV).
NAV is a valuable metric, but should be interpreted differently based on the type of mutual fund. While equity fund NAVs fluctuate due to stock market movements, debt fund NAVs tend to be more stable. Liquid funds have minimal NAV changes, whereas close-ended funds may trade at a premium or discount.
Instead of focusing only on NAV, investors should assess performance consistency, risk exposure, and investment objectives before selecting a fund.
While Net Asset Value (NAV) in mutual funds and Book Value Per Common Share in stocks represent per-unit valuations, they serve different purposes and are calculated differently. Here’s a detailed comparison:
1. Definition
- NAV (Net Asset Value) in Mutual Funds: It represents the per-unit price of a mutual fund, calculated by dividing the total market value of assets (minus liabilities) by the number of outstanding units. NAV reflects the fund’s current market value.
- Book Value Per Common Share represents a company’s net worth per share, calculated by dividing total shareholders’ equity (assets minus liabilities) by the number of outstanding shares. It reflects the company’s financial position under accounting principles.
2. Purpose & Significance
- NAV helps mutual fund investors determine the price at which they can buy or redeem units. It indicates a fund’s value but does not directly influence its performance.
- Book Value Per Share (BVPS) helps stock investors assess whether a company’s stock is overvalued or undervalued compared to its book value. A higher BVPS may indicate financial strength.
3. Calculation Method
- NAV Formula (Mutual Funds):
NAV = (Total Assets – Total Liabilities) ÷ Total Outstanding Units
- Book Value Per Share Formula (Stocks):
Book Value Per Share = Shareholders’ Equity ÷ Total Outstanding Shares
4. Market Impact
- NAV does not fluctuate during market hours; it is calculated once at the end of the trading day based on the closing value of a mutual fund’s holdings.
- BVPS remains constant until financial statements are updated (quarterly or annually), but it can influence a company’s stock price if it is significantly higher or lower than the market price.
5. Price Determination
- Mutual fund units are bought or redeemed based on their net asset value (NAV), meaning investors cannot trade them at a premium or discount to the NAV.
- Stocks trade at a market price, which can be higher or lower than the book value per share (BVPS), depending on factors such as investor sentiment, earnings potential, and market conditions.
Example for Clarity
✅ NAV Example: A mutual fund with total assets worth ₹100 crore and liabilities of ₹5 crore, with 10 crore outstanding units, will have a NAV of ₹ 9.50 per unit.
✅ BVPS Example: A company with shareholders’ equity of ₹500 crore and 50 crore outstanding shares will have a BVPS of ₹10 per share. However, if the stock trades at ₹50, investors expect higher future earnings.
Role of NAV in the Performance of a Fund
NAV plays a crucial role in determining the value of a mutual fund investment, but it is not a direct indicator of a fund’s performance. Many investors mistakenly believe that a fund with a lower net asset value (NAV) is “cheaper” and has more potential for growth, while a higher NAV means the fund is more expensive. However, NAV simply reflects the per-unit value of the fund’s assets and is influenced by market fluctuations, dividend payouts, and new unit issuances.
The actual performance of a mutual fund is measured by its returns over time, not just its net asset value (NAV). The percentage increase or decrease in NAV over a period, along with factors like dividend distribution, capital appreciation, and the fund manager’s strategy, determines whether the fund is performing well. For example, two funds with different net asset values (NAV) can generate the same returns if they invest in similar assets and grow at the same rate.
Additionally, NAV is crucial for tracking entry and exit points when investing in a mutual fund. Investors buy or redeem units based on the latest Net Asset Value (NAV), which is calculated at the end of each trading day. However, investors should evaluate parameters such as past performance, risk-adjusted returns, and portfolio composition, rather than focusing solely on NAV, to make informed investment decisions.
What is the Sale and Repurchase Price?
In mutual funds, sale and repurchase prices refer to the prices at which investors buy and sell units of the mutual fund. These prices are closely related to the fund’s Net Asset Value (NAV) but may include additional charges or deductions.
- Sale Price (Purchase Price): This refers to the price at which investors purchase mutual fund units from the fund house. In open-ended mutual funds, the sale price is typically the fund’s net asset value (NAV). However, if there is an entry load (a charge levied at the time of investment), the sale price will be NAV + the entry load percentage. Most mutual funds today do not charge an entry load, so investors typically purchase units at the net asset value (NAV).
- Repurchase Price (Redemption Price): This is the price at which investors sell their mutual fund units back to the fund house. The repurchase price is usually the NAV of the day the redemption request is processed. If the fund charges an exit load (a fee for withdrawing investments before a specified period), the repurchase price will be the NAV minus the exit load percentage.
For example, if a mutual fund has a net asset value (NAV) of ₹100 and an exit load of 1%, an investor redeeming units will receive ₹99 per unit (₹100 – 1%). Understanding the sale and repurchase prices is crucial for investors to accurately assess the costs of entering or exiting a mutual fund investment.
How Investors Use NAV?
Net Asset Value (NAV) is a crucial metric for mutual fund investors, helping them make informed investment decisions. While NAV does not indicate whether a mutual fund is expensive or cheap, it plays a significant role in tracking the value of an investor’s holdings, determining purchase and redemption prices, and assessing fund performance. Here’s how investors use NAV:
- Buying and Selling Mutual Fund Units:
Investors use the Net Asset Value (NAV) to determine the price at which to buy or redeem mutual fund units. When an investor purchases units, the number of units allotted is based on the NAV of that day. Similarly, when redeeming units, the NAV determines the amount received. - Tracking Investment Value:
Since NAV fluctuates daily, investors use it to monitor the value of their investments. By multiplying the NAV by the number of units held, they can calculate the current worth of their mutual fund portfolio, which helps them track their returns over time. - Comparing Mutual Funds:
While NAV alone does not indicate a fund’s performance, investors can compare mutual funds by examining their historical returns, portfolio composition, and the expertise of their fund managers. A lower NAV does not mean a fund is cheaper or better; a higher NAV does not necessarily indicate a more expensive or superior fund. - Systematic Investment Planning (SIP):
Investors who invest through a Systematic Investment Plan (SIP) buy mutual fund units at different NAVs over time. This technique, known as rupee cost averaging, helps mitigate market volatility by spreading investments over multiple NAV levels. - Assessing Dividend and Growth Options:
In mutual funds, the NAV is also used to determine whether an investor should opt for a growth or dividend option. In a growth plan, profits are reinvested, thereby increasing the Net Asset Value (NAV) over time. In contrast, a dividend plan distributes earnings to investors, which reduces the net asset value (NAV) accordingly.
By understanding and using NAV effectively, investors can make informed decisions that align with their financial goals, risk tolerance, and investment strategy.
FAQs on Applicability of NAV Based on Realisation of Funds
As per SEBI regulations, effective 1st February 2021:
- The NAV applicable for purchase transactions is based on the realisation of funds by the mutual fund house, not just the investment time.
- This applies to all schemes except liquid and overnight funds.
Investors must ensure they are credited on time to achieve the desired Net Asset Value (NAV).
Final Thoughts
Net Asset Value (NAV) is fundamental in mutual fund investing. It serves as a benchmark for determining the value of an investor’s holdings, tracking fund performance, and executing buy or sell transactions. While NAV is crucial for understanding mutual funds’ operations, it should not be the sole factor in investment decisions. Instead, investors should consider additional aspects such as the fund’s historical performance, risk exposure, expense ratio, and portfolio diversification before investing.
A common misconception is that a lower NAV means a fund is cheaper or of higher quality. Still, mutual fund investments should be evaluated based on their potential for returns, consistency, and alignment with financial goals. Whether you choose a growth or dividend option, invest through Systematic Investment Plans (SIPs) or lump sums, or select between open-end and closed-end funds, the Net Asset Value (NAV) plays a crucial role in shaping your investment experience.
Before investing in mutual funds, investors should evaluate their risk tolerance, investment horizon, and financial objectives. Seeking guidance from a financial consultant can help make well-informed investment choices. Understanding NAV and its functions within the mutual fund ecosystem enables investors to make more informed financial decisions and achieve their wealth-building goals.
Disclaimer
Mutual fund investments are subject to market risks, so read all scheme-related documents carefully before investing. Past performance is not indicative of future results. The information provided in this blog is for educational and informational purposes only and should not be considered investment advice. Investors should consult their financial advisors before making any investment decisions. VSJ FinMart is an AMFI-registered mutual fund distributor (MFD) that does not provide portfolio management or stock advisory services.