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When opting for a mutual fund, investors often get carried away by its past returns. They forget to ask the crucial question – how much is the mutual fund worth? In this article, we will cover everything about NAV.

  1. What is NAV?
  2. How is NAV relevant to investors?
  3. What is the difference between NAV & Market Price?
  4. How is NAV calculated?
  5. How does investment-timing affect NAV
  6. What is the role of NAV in fund performance?

 

1. What is NAV?

A mutual fund’s overall cost will depend on the price per fund unit. This is the Net Asset Value or NAV. If you tote up the market value of all the shares in a portfolio, be it cash or expenses, and divide it by the number of current fund units, you get the NAV. In short, the value of one unit by the book.

Generally, mutual funds begin with a unit-cost of ₹10 and it rises as the fund’s assets under the management grow. So, a popular fund will have a higher Net Asset Value than a less popular one. This brings us to the next question. How important is the Net Asset Value when selecting a mutual fund?

 

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2. How is NAV relevant to investors?

Many investors generally perceive that a mutual fund at Rs. 15 is economical compared to one at Rs. 20. But this is not an accurate observation at all. If you understand why it can help you analyze better and choose a fund wisely. Investors tend to assume that the Net Asset Value and the price of an equity share are the same, which is not true. For instance, if both the above funds have the same portfolio – then the NAV doesn’t make a difference to the cost of the fund.
 

3. What is the difference between NAV & Market Price?

For a company’s shares to be available for investors to buy or subscribe, it has to be listed on the stock exchange. The cost of its share is as mentioned on the stock exchange. Factors like demand-supply and company’s potential also decide the share price. So, the Net Asset Value will always be different from the market price of a share.

 

Net Asset Value
 

4. How is NAV calculated?

a. General Net Asset Value Calculation

If a mutual fund has a NAV of ₹500, then that is how much you will have to pay for one unit of that mutual fund. Conversely, if you invest ₹5000 in a mutual fund with a Net Asset Value of ₹500, then they will allow you 10 units of that fund. The cost of an equity fund is the sum individual cost of every share it has. These price fluctuations are subject to change as per the market and this is why mutual fund portfolio comes with a daily value.

b. Daily NAV Calculation

All mutual companies estimate their portfolio worth once the stock market closes at 3.30 PM, each day. The market opens again the next day with the previous day’s closing share prices. The fund house deducts every payable and expense accordingly to calculate Net Asset Value of the day using the given formula.

Money remaining in the bank is added and the money payable to others are subtracted to determine the asset value of the fund. The fund manager also deducts the daily expenses incurred to manage a fund from the asset value. This total asset value is divided by the number of units issued so far, resulting in that day’s cost per unit. Since the majority of the funds are open-ended, new investments and fresh withdrawals can impact the units. If the fund manager deems fit, he/she may put in additional sum or sell some shares.

Net Asset Value = [Assets – (Liabilities + Expenses)] / Outstanding Units

 

5. How does investment-timing affect NAV

A mutual fund company releases its latest NAV on all working days, due to which it is strictly time-bound. This is why mutual funds keep a deadline for daily investments, which is generally 2 PM. So, if you invest before 2 PM, they allow you the fund units on that day’s Net Asset Value. For investments made after 2 PM, the units are allotted on the next business day’s NAV. The same applies for redemption too.
 

6. Role of NAV in fund performance

A lot of investors think of a mutual fund asset value in the same vein as a stock price. This causes them to believe that a fund with a lower Net Asset Value is cheaper and hence, a better investment. In truth, it is not an indicator of a mutual fund performance. A lower value alone does not make a fund a better investment or vice versa. Hence, it should not be the only determining factor to choose a mutual fund.
 

Illustration – Role of NAV in fund performance

Let us look at 2 funds we have picked at random. On 21 September 2017, the NAV of Frontline Equity was ₹215.77 and that of Focused Bluechip Equity was ₹38.53. There is a stark difference in the Net Asset Value of both funds, but as the table below shows, the performance of both funds are comparable.
 

Fund name NAV (₹) Launch date AUM (₹) 1-year returns (%) 3-year returns (%) 5-year returns (%)
Birla Sun Life Frontline Equity 215.77 30 August 2002 18,948 crore 17.71 13.35 19.33
ICICI Pru Focused Bluechip Equity 38.53 23 May 2008 14,337 crore 18.37 11.94 17.63

 
Basically, the NAV should not have bearing on any of your fund selection. It basically shows how the underlying assets have performed. In the above table, the NAV of ICICI Prudential fund is relatively lesser than the Birla Sun Life fund. However, it is not an appropriate indicator of fund performance. You need to look for returns perspective keeping your investment horizon in mind and make an informed decision.

In short, a fund’s NAV is more useful in understanding how the fund performs on an everyday basis. It is not a predictor of lucrativeness. Always look at the fund’s historical performance and current cost among other parameters before investing.

 

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