What is mutual fund NAV? How does it increase or decrease?

As per the guidelines of the market regulator Securities and Exchange Board of India (SEBI), all mutual funds must mandatorily declare their NAV at the end of every business day.

July 10, 2019 10:19 IST | India Infoline News Service
As an investor in mutual funds, you may have come across a term called NAV, which refers to Net Asset Value of a mutual fund. It is the price at which a single unit of a mutual fund is traded. As per the guidelines of the market regulator Securities and Exchange Board of India (SEBI), all mutual funds must mandatorily declare their NAV at the end of every business day. However, does NAV really matter to you? Does it matter if it increases or decreases every day? Should you look at the NAV while buying mutual fund units? Let’s find some answers to these questions:

NAV is not equivalent to stock price
Since NAV of mutual fund schemes is declared every day, you may think it is like a price of a stock. It is however, entirely different. Stock price is important because it is an indication of the performance of the company’s share on a trading day. As the market fluctuates the stock price moves up or down, but the price is available throughout the day.
A mutual fund, however, invests in a bunch of assets. These may include stocks bonds or a combination of both. The NAV of a fund is therefore based on all its underlying assets. Let us see how it is calculated: NAV= (Assets- Liabilities)/ Number of outstanding units. Thus, unlike a stock price, the NAV of a mutual fund scheme does not give you an idea about the daily performance of the fund. It is rather, a reflection of the basic worth of the fund.

The highs and lows of NAV
As discussed until now, unlike stocks, mutual fund NAVs do not say anything about the performance of the fund. Thus, while investing in a fund the increase or decrease should not influence your purchase decision as it is nothing but the performance of the underlying assets of the fund.

Now let us see some common myths regarding highs and lows of NAVs.

When a mutual fund announces a New Fund Offer (NFO) at the face value of Rs10, some investors usually rush towards them because units are “cheap”, and thus, they can collect more units. However, if you purchase fresh units on this logic, it may harm your portfolio as the fund maybe a complete mismatch with your risk profile.
The other myth related to low NAV is the idea that you will be a higher beneficiary when the fund declares a dividend (since you have garnered a higher number of units). The reality is that a dividend is paid out of your own money and the NAV in fact, comes down after dividend declaration.

High NAV
Since there is a comparison with stocks, some investors tend to think that a high NAV of fund means that the fund has reached its maximum potential and is no longer attractive. This is again a myth. A fund may have a high NAV over a period of time, simply because the fund is well managed and the portfolio of the underlying stocks/bonds are successful in meeting the objective of the fund.

The last word
Thus, while purchasing a mutual fund scheme, it is fair to say that the NAV of the fund is of little significance. The increase or the decrease of NAV is a function of how well the fund manager executes a stock/bond picking strategy. Instead of the NAV, it is thus prudent to base your investment decision on your risk profile, the time horizon of investment you have in mind and your financial goals.

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