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Mutual Fund NAV: What is NAV in Mutual Fund?

An Overview of Mutual Fund NAV

When you first plan to invest in mutual funds, remember to ask the question, "what are the expected returns?" Your financial advisor will tell you that the returns on a mutual fund are dependent on a number of factors. One of these factors that determine the value of your mutual fund investment is the fund's NAV or Net Asset Value.

What is NAV

What is NAV in mutual funds? This article not only explains what is net asset value in mutual funds but also explains why NAV is relevant to your decision to invest in a mutual fund and how NAV is calculated.

Net Asset Value (NAV)

In simple terms, net asset value refers to the market value of a mutual fund unit. Just like shares and stocks are priced per unit, a net asset value under a mutual fund is the price per share purchased by the fund manager managing the mutual fund.

Role of NAV

If you have had some experience investing in a mutual fund before, you will know that mutual funds are all about pooling together a large sum of money from various investors and investing those funds in stocks and securities.

It is the market value of securities under a scheme. When expressed in per-share basis, it represents fund’s per unit market value. Investors buy or sell fund units based on the per-share value. As the value of securities in fund increases, NAV also goes up and vice versa.

Methodology of Calculating NAV

Now that you know what is net asset value under mutual funds, it's time to understand how exactly NAV is calculated.

There are two methods to calculate the net asset value of a mutual fund - a general net asset value calculation and a daily net asset value calculation.

  • General Net Asset Value Calculation

    When you start investing in a mutual fund, your fund manager will let you know of the current net asset value of the mutual fund. If it is Rs.100, then each unit you agree to purchase will be for Rs.100. This is just for the first time.

    Let's say you have opted for a systematic investment plan (SIP) and aim to invest Rs.5000 per month. This means you will be required to pay Rs. 5000 monthly and your fund manager will purchase an X number of units based on the net asset value of the fund on the day of purchase. In this case, you will be eligible to purchase 50 fund units for Rs. 5000, i.e. considering the net asset value is Rs. 100 per unit.

    Remember, in case you are investing in an equity fund. The cost of the equity fund equals the total cost of all the shares purchased under that fund. The price of fund changes as per the share market fluctuations, therefore this type of portfolio has a daily value.

    Let's learn about how daily net asset value under a mutual fund is calculated.

  • Daily net asset value calculation

    If you are familiar with the stock market, you will know that the trading hours of a stock market are from 9:00 am to 3:40 pm i.e. a pre-opening session from 9:00 to 9:15 AM, followed by trading hours from 9:15 am to 3:30 pm and a closing price calculation from 3:30 to 3:40 pm. During the last ten minutes of market closing, all asset management companies estimate their portfolio and calculate the closing price i.e. the net asset value of the mutual fund. The fund will open the next morning at this net asset value.

How is NAV calculated?

The mutual fund house or asset management company deducts all the outstanding liabilities and expenses accordingly to calculate net asset value (NAV) of the day by using the following formula -

Formula to calculate net asset value under a mutual fund
Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

Under a mutual fund scheme, assets are classified into two – liquid cash and securities. These assets also take into consideration interest accrued and dividends. Further, the cash balance is added and then after the money payable to others is subtracted to determine NAV. Finally, your fund manager also deducts the daily expense of managing the mutual fund.

Why is net asset value relevant to an investor's investment decision?

While the net asset value of a mutual fund will in no way determine the future performance of a mutual fund, a mutual fund that has a higher NAV is an indicator of a fund that has done well and is well managed. This can be one of the determining factors that will make your decision to invest in mutual funds much more straightforward.