Net Asset Value (NAV) of Mutual Funds: Meaning, Calculation & Importance

Planning to start investing in mutual funds? There are a few key terms you should be familiar with. It determines the value of each mutual fund unit. Understanding the term NAV for mutual fund investments can help you compare different mutual fund schemes.

A rise in NAV does not always indicate high returns for mutual fund investors, nor does a fall in NAV indicate low returns. Instead, NAV refers to the value of mutual fund investments after the deduction of liabilities. Read on to learn more about NAV in detail.

Meaning Of NAV In Mutual Funds

The Net Asset Value (NAV) of a mutual fund scheme is the value per unit of the mutual fund. Net Asset Value in mutual fund investments measures the price at which the units can be redeemed or purchased. It refers to the total value of the mutual fund scheme.

Given that mutual fund schemes invest in assets such as stocks, bonds, and other securities, their value fluctuates from day to day. Thus, the Net Asset Value changes in line with the stock market.

How Is NAV Calculated?

The NAV for different mutual fund schemes can be derived by subtracting liabilities from assets, then dividing the result by the number of units still available. This is done to calculate the unit price of mutual funds.

Formula used for calculating NAV:

NAV = (Total Assets –Total Liabilities)/Total outstanding units

How to calculate the NAV of a mutual fund with an example

Let's take an example of a mutual fund with assets worth ₹50 crore and liabilities of ₹5 crore. The outstanding units of the MF are 5 crore units.

With the help of the NAV formula, we can calculate the following:

NAV= (₹50 crore – ₹5 crore)/ 5 crore = ₹45 crore/5 crore = ₹9 per unit

In this example, we can see that the NAV is ₹9 per unit. In simple words, each unit held by you, as an investor, is currently valued at ₹9.

Types Of NAV

NAV is computed differently based on the type of mutual fund being considered. There are two major types of NAV. They include open-end mutual funds and closed-end mutual funds. Knowing the two types will assist you in understanding how to apply them.

Open-Ended Fund NAV

In open-ended mutual funds, the NAV is calculated at the end of every business day. This is based on the closing market value of underlying securities. You can purchase or redeem units directly with the fund house at this daily NAV price. Since the portfolio value changes with market movements, the NAV also fluctuates from one trading day to the next. This reflects the current per-unit value of the fund.

Close-Ended Fund NAV

The calculation of NAV for closed-end funds is done on a regular basis. Is eless, it is not possible to withdraw the units of the fund prior to its maturity date. What you are only able to do is trade the same on stock exchanges at a price other than the NAV.

Importance Of NAV For Investors

NAV plays an important role in helping you understand a mutual fund's value. Here is how:

Tracking Fund Performance

NAV helps you assess the historical performance of a mutual fund. Comparing NAV figures across different periods reveals whether the fund's asset value has risen or fallen over time

Buying And Selling Decisions

Mutual Fund units are offered and redeemed according to NAV. In the case of open-ended mutual funds, buying and selling are done at the NAV price. Therefore, it is a critical component that should be taken into account when making an entry or exit from an investment. Understanding the NAV helps you make informed decisions about your investments.

Portfolio Valuation

NAV helps you determine the current value of your mutual fund holdings. Simply multiply the number of units you hold in the scheme by its NAV.

Sources

SEBI Investor Education

Morningstar