Mutual fund investments require you to understand some basic concepts. One such concept is Net Asset Value (NAV) and it is central to all types of mutual funds including equity funds and debt funds. Mutual funds invest in several underlying securities. For instance, an equity fund primarily invests in stocks of multiple companies and other equity-related instruments. When you invest in a mutual fund scheme, you are not being given a part of those underlying securities. Instead, you get allotted units of the mutual fund scheme that represent the underlying securities. The units of a mutual fund scheme get allotted based on its NAV.
But what is the mutual fund NAV? It is the per unit market value of the mutual fund scheme. So, when you invest in mutual funds, you can think of NAV as of the price at which you buy the units. At the time of redemption too, NAV is the amount you receive minus the exit load if any. Now that you know what NAV is, let’s look at how NAV is calculated in mutual funds.
How is NAV Calculated in Mutual Funds?
To calculate mutual fund NAV, the total value of all the underlying securities including liquid cash is considered as total assets. From the total assets, the liabilities are deducted and then this number is divided by the number of outstanding mutual fund units. Hence, the formula for mutual fund NAV is:
Net Asset Value = (Assets – Liabilities) / Total number of outstanding units
The NAV of a mutual fund is calculated every day. This is because the market price of the underlying securities of a mutual fund, such as stocks, changes every day. The NAV is calculated at the end of the trading day once the market has closed and is updated on the mutual fund house’s website on the same day. However, the cut-off time for mutual fund NAV when buying and selling is considered as 3 pm. If you buy or sell after 3 pm, the NAV of the next working day will be applicable.
How important is the NAV?
The mutual fund NAV is important because the units are allotted on their basis. However, the NAV of a mutual fund is not an accurate indicator of the scheme’s performance or the returns. NAV is not the same as the price of a stock. Hence, a low or a high NAV does not represent the potential of an investment. A scheme with a lower NAV would mean that you get allotted more units while that with a higher NAV means you would be allotted more units for the same investment amount. However, the value of your investment would not be determined by the NAV. Hence, a lower NAV does not mean that the mutual fund investment is affordable, or a higher NAV does not imply that your returns too will be high.