As an investor, you may have come across the term NAV (Net Asset Value) while researching mutual funds. But what exactly is NAV, and why is it important for your investments?
Understanding NAV can unlock the mystery of mutual funds and help you make informed decisions about where to put your money. Mutual funds are an investment vehicle to invest in stocks, bonds, government securities, corporate securities and other such interest rate sensitive securities.
In this article, we’ll delve into the details of NAV, including what it is, how it’s calculated, and why it matters. We’ll also explore how NAV can impact your investments, and what you should consider when evaluating mutual funds based on their NAV.
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NAV or Net Asset Value is a term used to denote the price per unit of a mutual fund scheme. Buying or selling in mutual fund schemes is executed on the basis of their NAVs. It is just like the share prices in share trading.
Mutual funds pool money from large number of investors and invest it in different securities or assets like stocks, bonds or money market instruments etc. These funds are invested by professional fund managers hired by the asset management companies (AMCs). Investing involves expenses like transaction costs and fund managers’ fee.
NAV or net asset value is the value of a mutual fund’s assets minus its liabilities, divided by the number of outstanding units. It is calculated at the end of each trading day and represents the price per unit of the mutual fund. For example, if a mutual fund has ₹100 million in assets and 10 million units outstanding, the NAV would be ₹10 per unit.
A researchgate publication states the Net Asset Value as an indicator to determine the purchase price and selling price of each mutual fund unit by adding all the funds from each of the securities such as stocks, bonds etc. and deducting the liabilities or the operating costs.
For example, you want to invest Rs 10000 in a mutual fund scheme. Suppose it’s NAV is Rs 10 at the time of investing. You shall be allotted 10000/10 = 1000 units of that fund scheme. As the NAV per unit increases, your investment value increases which you get back by selling those 1000 units.
It’s important to note that the NAV of a mutual fund can fluctuate on a daily basis, as the value of its assets and liabilities change. At the end of the trading day, the fund managers calculate the closing price of all the securities within its portfolio, add the value of any additional assets, subtract the liabilities, and calculate NAV based on the number of outstanding units.
NAV of a mutual fund can be a good indicator of its performance, but it’s not the only factor to consider.
NAV can have both a direct and indirect impact on your mutual fund investments. Directly, the NAV determines the price at which you can buy or sell units of a mutual fund. For example, if the NAV of a mutual fund is ₹10 and you want to buy 100 units, you would need to invest ₹1,000. If the NAV increases to ₹12, your investment would be worth ₹1,200.
Indirectly, the NAV can be an indicator of a mutual fund’s performance. A mutual fund with a higher NAV may indicate that its portfolio of investments have performed well, while a mutual fund with a lower NAV may indicate that its investments have underperformed. However, it’s important to note that a high NAV doesn’t necessarily mean a mutual fund is a better investment.
It’s important to note that the NAV of a mutual fund is not a sole indicator of its performance or potential returns. A mutual fund with a high NAV may not necessarily be a better investment than one with a lower NAV.
It’s important to note that NAV includes fees or expenses associated with the mutual fund, which can also impact your returns. Higher the expenses, lower the NAV.
NAV is calculated by subtracting a mutual fund’s liabilities from its assets and dividing it by the outstanding units of the mutual fund scheme. The assets of a mutual fund include stocks, bonds, cash, and other investments, while its liabilities include expenses, fees, and any outstanding debts. The NAV of a mutual fund is calculated at the end of each trading day, based on the closing prices of its underlying assets.
There are several factors that can affect the NAV of a mutual fund. One of the biggest factors is the performance of the mutual fund’s underlying investments. If the stocks or bonds held by the mutual fund increase in value, the NAV will increase as well. Conversely, if the investments decrease in value, the NAV will decrease.
Other factors that can affect the NAV of a mutual fund include fees and expenses, which can reduce the overall value of the fund. The exchange traded funds or ETFs have very low fee and expenses; hence they have high NAV and they offer better returns.
Additionally, the number of units outstanding can also affect the NAV, as an increase in the number of units can dilute the value of the fund.
Calculating the NAV of a mutual fund can be a complex process, as it requires taking into account all of the fund’s assets and liabilities. However, the basic formula for calculating NAV is:
NAV = (Total Value of Assets – Total Value of Liabilities) / Number of Units Outstanding
For example, if a mutual fund has ₹100 million in assets, ₹10 million in liabilities, and 10 million units outstanding, the NAV would be:
NAV = (₹100 million – ₹10 million) / 10 million = ₹9 per unit
Each AMC can launch any number of different schemes under its name and each scheme has different underlying portfolio structure. These can be equity fund schemes which have entire exposure to equities, exchange traded funds (ETFs), balanced funds or liquid fund schemes which have bonds or debentures which are safer.
Each scheme has different NAV according to its portfolio which keeps changing according to the invested securities performance. In case of market up move, they tend to rise while they fall when markets correct. The NAVs of the Equity Schemes change much rapidly than the Liquid Schemes or Ultra Short-Term Schemes.
While NAV is just one factor to consider when selecting a mutual fund, it can provide valuable insights into the fund’s overall performance. A mutual fund with a consistently high NAV may indicate that it has a strong track record of performance, while a mutual fund with a low NAV may indicate that it has struggled to meet its investment objectives.
It’s important to note that NAV should not be the only factor to consider when selecting a mutual fund. Other factors, such as the fund’s expense ratio, management style, and investment objectives, should also be taken into account.
The NAV for mutual fund redemption is actual net asset value per unit on the day of order execution minus any exit load if applicable.
Suppose the NAV of a fund scheme is ₹ 15, and the applicable exit load is 1%, then the NAV for mutual fund redemption is ₹ 14.85.
Exit load = 1/100 x 15 = 0.15
NAV for redemption = 15 – 0.15 = ₹ 14.85
Investing in a mutual fund with a high NAV may have certain advantages and disadvantages. On the one hand, a high NAV may indicate that a mutual fund has a strong track record of performance, which can be attractive to investors. Additionally, mutual funds with high NAVs may be less volatile than those with lower NAVs, as the higher value of the fund can provide a cushion against market fluctuations.
On the other hand, investing in a high NAV mutual fund can come with certain disadvantages. For one, high NAV mutual funds may have higher expense ratios than those with lower NAVs, as the fund manager may be charging a premium for its performance. Additionally, high NAV mutual funds may be less accessible to smaller investors, as the high price per share can make it difficult to invest in the fund.
People generally come across a question; is mutual fund with low NAV better?
The answer is not really. What makes a NAV better for a mutual fund is not the value of NAV but the performance of the mutual fund scheme.
Higher NAV mutual fund scheme can be cheap to buy as compared to low NAV fund scheme. Although, low NAV results in purchasing a greater number of units of a fund scheme but still it can be a costly investment.
As we know the NAV of a fund scheme depends on the net asset value of the fund, the fund scheme with higher NAV is quite possibly giving better performance resulting in appreciation of net assets.
It’s important to remember that a high NAV does not necessarily mean a good investment, as it could be due to high expenses or overvaluation of assets. Instead, investors should look for consistent growth in NAV over time and compare it to other similar funds to make informed decisions.
There are several common misconceptions about NAV that investors should be aware of. One of the biggest misconceptions is that a high NAV indicates that a mutual fund is a better investment than one with a lower NAV. While a high NAV can be indicative of strong performance, it’s not the only factor to consider when selecting a mutual fund.
Another misconception is that the NAV of a mutual fund is always accurate. While mutual fund companies are required to calculate NAV accurately, there can be errors in the calculation process. Additionally, the NAV can change throughout the day due to market fluctuations, which can make it difficult to accurately calculate the value of a mutual fund.
In conclusion, NAV is an important factor to consider when investing in mutual funds, but it’s not the only factor.
While a high NAV can be indicative of strong performance, investors should also consider other factors, such as expense ratios, investment objectives, and management style, when selecting a mutual fund.
Additionally, it’s important to remember that NAV can fluctuate on a daily basis and is not always an accurate indicator of a mutual fund’s overall value. By taking a holistic approach to mutual fund investing, investors can make informed decisions that align with their financial goals and risk tolerance.