What Is NAV In Mutual Funds?

You must have come across the term ‘NAV’ in Mutual Funds. We often find this term in our mutual fund portfolio or when exploring new funds to invest in. In simple terms, it is the per-unit price of a mutual fund. In this article, let’s understand what Net Asset Value or NAV means, how it is calculated, and its importance in the world of mutual funds.

What Does NAV Mean In Mutual Funds?

NAV stands for Net Asset Value. It is the price at which each mutual fund unit is bought and sold. So, if a fund has a NAV of say ₹10 and you want to invest ₹10,000; you will get 1000 units (10,000/10) of that mutual fund. Let’s understand the concept of this term thoroughly with an example:

We know that a mutual fund pools money from multiple investors and then invests their money in stocks or debt depending on the fund type. 

Let’s take the example of an equity mutual fund whose NAV is ₹10. Say you invested ₹55,000 in this fund. Along with you, 9 other investors invested the following amount: 

You invested ₹55000, so you got 5500 units (55000/10) on the basis of the NAV. The 9 other investors invested varying amounts and got units proportional to their investment. Total pool: ₹6,25,000 → 62,500 total units.

The fund manager takes this ₹6,25,000 and invests it in different stocks. Let’s say, the fund manager invested the total corpus across 10 stocks. How a fund manager prefers to allocate this amount across stocks and in which stocks are at his discretion and professional understanding. 

Since stocks change in value every day. Let's assume, this is what the initial investment and the value of each stock looked like 5 days later. 

In five days, the total investment grew from ₹6,25,000 to ₹6,35,030, reflecting a 1.60% increase.

Since NAV is directly linked to the fund’s value, the new NAV is calculated as:

New NAV = 10× (1+1.60%) =  10.16%

This is how NAV changes every day. It moves depending on the value of the underlying securities. When you invest in a mutual fund, units are allocated based on that day's NAV. Similarly, when you redeem your investment, the withdrawal amount depends on the NAV on the day of redemption.

The above example is oversimplified. To arrive at the final NAV further liabilities and expenses are deducted. 

What Is The Net Asset Value Formula?

Net Asset Value (NAV) represents the per-unit price of a mutual fund. It is calculated using the formula:

NAV=  (Total Assets−Total Liabilities)/Total Outstanding Units

Where:

• Total Assets include investments, cash, receivables, and other holdings.
• Total Liabilities include expenses, management fees, and other payables.
• Total Outstanding Units are the total number of units held by investors.

How Is NAV Calculated In Mutual Funds?

The Net Asset Value of a fund is calculated every day after the stock market closes at 3:30 pm. The fund houses calculate that day’s asset and liabilities valuation to arrive at the net valuation.

This NAV decides the per unit price at which investors will purchase or withdraw their mutual fund investment. Net Asset Value fluctuates depending on how the underlying asset (Stock or debt) moves. If they rise, NAV rises. If they fall, NAV declines.

Is Expense Ratio Included in NAV?

Yes, Expense Ratio is included in NAV. The expense ratio is charged on a percentage basis of the total assets of the fund. So, for example, if a fund declares its expense ratio to be 1% and its total AUM is ₹100 crores. The expense ratio comes to ₹1 crore (100 Cr X 1%). 

Now, the expense ratio is deducted every day while calculating the NAV of the fund. To understand how this works, let’s break it down with an example.

Imagine a mutual fund with a total asset size (AUM) of ₹100 crores. The fund has declared an expense ratio of 1%, meaning 1% of the total assets are charged annually to cover fund management and operational costs.

Now, 1% of ₹100 crores comes to ₹1 crore. This is the total annual expense. However, rather than deducting this amount all at once, it is spread out over the year and deducted daily. Since there are 365 days in a year, the daily deduction would be ₹1 crore ÷ 365 = ₹73,972.60.

This deduction happens before the NAV is calculated each day. So, when an investor looks at the NAV of a fund, it already reflects these daily deductions.

Now, let’s see how this impacts an individual investor. 

Suppose you invest ₹1,00,000 in this fund. Since the expense ratio is 1%, your total annual charge would be ₹1,000 (1% of ₹1,00,000). But just like at the fund level, this charge is deducted daily. So, on a per-day basis, ₹1,000 ÷ 365 = ₹2.74 is deducted from your investment.

For example, let’s say that after 10 days, your investment has grown to ₹1,00,250. However, after deducting the daily expense of ₹2.74, the amount reflected in your portfolio would be ₹1,00,247.26.

This daily deduction continues as long as you stay invested, but since the NAV itself is adjusted after expenses, investors don’t need to manually subtract these charges, they are already factored into the price at which units are bought and sold.

What Is The Importance Of NAV In Mutual Funds?

The NAV of a mutual fund is a reflection of how a mutual fund performs. It is one of the most important metrics that investors consider when investing in a mutual fund. Below is the importance of NAV in a mutual fund:

1. Performance

The NAV of a mutual fund tells you how the fund has performed over a period of time. If the underlying asset of the fund has grown, the NAV rises. On the other hand, if the underlying asset of the fund falls, the NAV declines.

2. Fund Valuation

NAV indicates how much the fund is valued. When you invest in a mutual fund, units are allocated to you on the basis of the NAV. For example, if the NAV is ₹10 per unit and you invest ₹50,000, you will get 5,000 units of the fund.

3. Fund Comparison

The growth of the NAV tells you the performance of the fund. It can be used as a metric to compare and measure the performance of other funds. However, it is to note NAV is not supposed to be looked at in isolation. Moreover higher NAV does not suggest the fund is better.

How Does NAV Change Impact Mutual Fund Returns?

The Net Asset Value of your fund directly represents how the fund changes day on day. Here’s how the NAV changes reflect on your mutual fund returns in different scenarios:

If NAV declines

When a mutual fund's NAV increases over time, it generally indicates that the value of the underlying assets has grown. Capital appreciation is reflected in the increase in the NAV, meaning that as an investor, your investment has increased.

If NAV rises

If the NAV decreases, it usually signals that the fund's underlying assets have lost value. A drop in NAV indicates a capital loss, meaning the value of your investment has decreased.

How Does NAV Affect Lump Sum vs. SIP Investments?

When you make a lump sum investment, you invest a large amount all at once. The number of units you receive is based on the NAV on the day of your investment.

With SIP, you invest a fixed amount regularly rather than in a lump sum. Each SIP instalment buys units at the prevailing NAV on the date of the transaction.

This is where the benefit of rupee cost averaging comes in. You buy more units when the NAV is low and fewer units when the NAV is high, averaging the cost over time. This strategy reduces the impact of short-term market volatility.

Frequently Asked Questions (FAQ)