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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?

Most investors assume funds that deliver consistently higher returns should be the best one out there. This is not necessarily so. It depends on the cost of the mutual fund unit too, in other words, the Net Asset Value (NAV). This brings us to the next question. How important is NAV when selecting a mutual fund?

General NAV Calculation

If a mutual fund has an 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 an NAV of ₹500, then they will allot 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.

Daily Net Asset Value (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 expenses accordingly to calculate NAV 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 per unit NAV. Since 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

How investment-timing affects 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 allot you the fund units on that day’s NAV. For investments made after 2 PM, the units are allotted on the next business day’s NAV. The same applies for redemption.

Does NAV plays a role in mutual fund performance?

A lot of investors think of a mutual fund asset value in the same vein as a stock price. They believe that a fund with a lower NAV is cheaper and hence, a better investment. In truth, it is not an indicator of a mutual fund performance. A lower NAV 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.

Importance of NAV illustrated with an example

Birla Sun Life Frontline Equity and ICICI Prudential Focused Bluechip Equity are two popular large-cap equity funds. 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 NAV of both funds, but as the table below shows, the performance of both funds is 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

As is apparent, the ICICI Prudential fund is relatively newer than the Birla Sun Life fund. This could be one of the reasons why its NAV is comparatively lesser. However, its assets under management are high and the returns too are good. Hence, the NAV has no bearing on any of the fund’s performance.

Generally, mutual funds begin with an NAV of ₹10 and it rises as the fund’s assets under the management grow. So, a popular fund will have a higher NAV than a less popular one. A fund’s NAV is more of useful tool 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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