NAV ( Net Asset Value ) – NAV Definition & Importance of Net Asset Value in Mutual Funds

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You would find many investors focusing only on the past performance of a mutual fund. They forget to ask the crucial question – Will this mutual fund perform well in the future? In this article, we will cover everything about NAV.

What is NAV?

Net Asset Value (NAV) is the market value of all securities held by the mutual fund scheme. You would find the performance of a mutual fund scheme denoted by NAV or the Net Asset Value.

You can calculate the NAV per unit of the mutual fund by dividing the market value of the securities of the mutual fund scheme by the total number of units of the mutual fund scheme on any specific date.

NAV, in simple terms, is the price you pay for the units of the mutual fund scheme. Generally, mutual fund units begin with a unit-cost of ₹10 and it rises as the fund’s assets under the management grow.

You have mutual funds launching NFOs or New Fund Offers at a fixed price of Rs 10. However, you must understand that a lower NAV doesn’t mean a cheaper mutual fund. You have the NAV formula as total assets minus total liabilities divided by the total number of outstanding units. Here’s the formula to obtain NAV of a fund: NAV = (Total Assets – Total Liabilities) / Total Number of Outstanding Units

How is NAV relevant to investors?

You must avoid focusing only on the NAV of a mutual fund. For example, you select mutual fund schemes only because they have a lower Net Asset Value. NAV does not reflect the future prospects of the mutual fund scheme. It is just the price at which you may purchase or redeem units of the mutual fund scheme.

You may find the NAV of the mutual fund of low significance while investing in a mutual fund scheme. However, you must base your investment decisions on your investment objectives, risk appetite and time horizon to attain your financial goals.

What is the difference between NAV & Market Price?

You may find the Net Asset Value (NAV) of a mutual fund to be different from the market price of a share. You will find the market price of a share determined by the demand and supply and the view of the analysts on the future performance of the company.

You have the demand for the mutual fund not determined by the Net Asset Value (NAV). You purchase mutual fund units at the book value. You will find NAV determined by the AMC at the end of the trading day. It takes into account the closing market prices of all underlying securities in the mutual fund scheme.

How is NAV calculated?

General Net Asset Value Calculation

If you invest Rs 5,000 in a mutual fund with a net asset value of Rs 500, then you can purchase 10 units of the mutual fund. For example, you put Rs 1 lakh in Mutual Fund Scheme A and Mutual Fund Scheme B. The NAV of mutual fund scheme A is Rs 10 and that of mutual fund scheme B is Rs 20.

You have units of mutual fund scheme allocated as follows: Mutual Fund Scheme A : Rs 1,00,000 / Rs 10 = 10,000 units Mutual Fund Scheme B: Rs 1,00,000 / Rs 20 = 5,000 units.

Daily NAV Calculation

All mutual funds compute the market value of the securities after market hours each day. The mutual fund house deducts all the outstanding liabilities and expenses accordingly to calculate the net asset value (NAV) of the day using the given formula.Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units

Assets of a mutual fund scheme are divided into securities and liquid cash. Securities include equity instruments, debentures, bonds, commercial paper and other money market instruments.

The fund manager deducts all liabilities and expenses of managing the fund. You would find the NAV calculated by dividing the combined value of cash and securities in the portfolio of a mutual fund minus requisite liabilities and then dividing by the total number of outstanding units.

How does investment-timing affect NAV

You may consider the following rule wherever you invest in mutual funds. Starting from February 01, 2021, when purchasing mutual funds you will get the applicable NAV, subject only to availability and realisation of funds in the bank account of the AMC, before applicable cut-off timings for the purchase transactions. However, you must note that inter-bank transfer delays could mean the funds reaching the AMC on the following business day.

SEBI has restored the NAV cut-off timings for subscription and redemption of all mutual fund schemes to 3 PM. It is irrespective of the investment amounts for all mutual fund schemes. However, these regulations are not applicable to liquid and overnight funds for schemes more than Rs 2 lakh, as they already had these norms in place. You have subscription timings for liquid and overnight schemes as 1:30 PM on the relevant business day. It is 3 PM for redemption or sale of these mutual fund units.

For example, the AMC has received Rs 75,000 from you (time-stamped) before the cut-off time of 3 PM on Wednesday, 10th February 2021. If the fund house receives the amount in their account before the cut-off timing of 3 PM on 10th February 2021, you are allotted the closing NAV of 10th February 2021. However, if the funds reach the bank account of the AMC after the cut-off timing of 3 PM, you are allotted the NAV of the next business day (11th February 2021).

What about the redemption of mutual fund units? If the redemption transaction is received by the AMC up to 3 PM on a business day, you get the NAV of the same business day. However, if the transaction is received after 3 PM you get the NAV of the next business day.

Type of transactionWhether transacted before the cut-off timeWhether amount received by the scheme before cut-off timeApplicable NAV
Purchase and SIP InstalmentYesYesNAV of the same business day
YesNoNAV of the business day on which the scheme receives the amount before the cut-off time
NoYesNAV of the business day on which the time stamping is done before the cut-off
NoNoNAV of the business day on which the scheme receives the amount before 3 p.m

Role of NAV in fund performance

A lot of investors think net asset value is similar to 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 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 two 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.

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. Always look at the fund’s historical performance and current cost among other parameters before investing.

Fund name
NAV (₹)
Launch date
AUM (₹)
1-year returns (%)
3-year returns (%)
5-year returns (%)
Birla Sun Life Frontline Equity215.77
30 August 2002
18,948 crore
ICICI Pru Focused Bluechip Equity38.53
May 2008
14,337 crore

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