MF NAV stands for mutual fund Net asset value, which represents the unit price of the mutual fund. It is the price at which one may purchase or sell the mutual fund. NAV is an indicator of the market value of Mutual funds. Unlike shares and stocks, for which the price fluctuates every second, the NAV of the mutual fund scheme is determined daily at the end of the trading day. The cost of the mutual fund is determined by the closing price of all the securities held in the respective scheme following SEBI mutual fund regulation. As the market value of the securities changes daily, the NAV also gets affected daily.
What is the Connection between NAV and Mutual Funds?
A substantial number of investors’ money is pooled to form a fund. This pooled money is invested in n-numbers of stocks and other financial products, which provides fractional ownership to the investor. Each investor gets a certain number of fund shares based on the proportion of their invested amount. The investor may sell these shares to redeem the fund’s value.
A systematic pricing approach is implemented to regularise the buying and selling of the fund after its launching. NAV creates the pricing strategy for the fund. Mutual funds are valued every day, in fact, at the end of the day, based on their assets and liabilities. Now the question arises: what are assets and liabilities?
Assets
In mutual funds, assets are determined by all the investments and securities in the portfolio. Thus, assets mean the collective corpus managed on behalf of investors. This corpus is invested in various financial instruments to purchase shares or units of mutual funds, and the investor gets a fractional ownership stake in these assets. The value of these shares is determined as NAV, which is calculated by subtracting all the fund’s liabilities from its total assets and dividing the resultant figure by the number of outstanding shares or units.
Liabilities
Liabilities in mutual funds include all the obligations and the charges incurred in fund operation including the administrative charges, management fees, distribution fees, and taxes. These charges impact the cost structure of the mutual fund units. The MF NAV is calculated by subtracting the total liabilities from the entire asset value. Thus, the ups and downs in the value of assets and liabilities directly impact the net asset value.
How to calculate NAV?
NAV in mutual funds is calculated by using the following formula:
NAV = (Total Asset – Total Liabilities)/Total number of outstanding units
Factors to keep into consideration while calculating NAV are:
- NAV is calculated after the market closes because the transactions continue until the market remains open.
- The NAV is declared every day by the mutual fund house.
- Not all assets’ values are affected by the market, e.g., Cash derivatives.
When is NAV calculated?
After getting the answer to how to calculate NAV, the next question is, ‘When is NAV calculated?’. NAV is calculated at the end of the trading day. It is calculated based on the closing price of the fund’s securities of the day.
Let us understand the mechanism of NAV calculation with the help of an illustration –
A mutual fund company launches a new scheme ABC under which the unit is priced ₹ 10/-. Suppose the company mobilises ₹ 100 crores from various investors. Thus, the company will assign the units as per the amount invested by the investor. In this example, the mutual fund company issues ten crore units and allows them to the investors in the proportion of their investment. So, if the investor has invested ₹ 1 lakh in this fund, he will be assigned 10000 units.
The mutual fund company invests the entire mobilised amount in various securities whose market price fluctuates regularly. The next day, if the portfolio scheme value rises from 100 crores to 120 crores (ignoring the expenses to keep the calculation simple), then the NAV will be ₹ 12/- per unit. Thus, the amount of ₹ 1 lakh invested by the investor in the above illustration is now worth ₹ 1 lakh 20 thousand. Thus, it is pretty clear that NAV stands for the price at which investors purchase or sell units of mutual funds.
Impact of high or low NAV
There is a misconception that funds with high NAVs are expensive and perceived to offer low returns. Another misconception is that one must invest in funds with low NAV. People believe in supporting funds with low asset value to translate a more significant number of units, resulting in higher returns. However, the actual calculation is judged on the fund’s performance, not on NAV. It hardly makes any difference in the worth of the asset if you hold 1000 units of ₹ 10 each or 100 units of ₹ 100 each. Here, it indicates that the growth is higher in the second fund when compared to the first fund. However, most investors assume the second fund is riskier and opt for the first one.
Bottom line
NAV in mutual funds is merely the book value of the fund; thus, when deciding to invest in a mutual fund, one must rely on the fund’s performance rather than NAV. For this, you must trace the returns on the fund in the past few years.
