In a mutual fund’s fact sheet, we come across a fund’s returns that we use to analyse its performance. But have you ever thought about how returns are calculated? Mutual fund returns are calculated based on the net asset value (NAV). NAV is the unit price of the mutual fund. In other words, it is the price at which mutual funds are bought and sold. This article covers NAV, its importance, and its calculation in detail.
The net asset value is the price of a mutual fund similar to the price of a share. It is the price at which units are allocated to an investor. In other words, the number of units you get is calculated based on the NAV.
Number of mutual fund units = Investment amount/ NAV
Let’s take, for example, the NAV of the fund is Rs 30, and you plan to invest Rs 5,000 through SIP. The number of units you will be allocated is 166 units (Rs 5,000/30).
Apart from this, the NAV of a fund has very less relevance in mutual funds. It shouldn’t even be considered a parameter when selecting a fund for investment. This is mainly because the appreciation in the value of your investment is more important than the number of units you own.
The NAV of a fund is not similar to the price of a share. Hence a lower NAV doesn’t mean one mutual fund is better than the other. It should not even be considered an indicator for analysing a fund’s performance. The fund’s AUM, portfolio, expense ratio, and past performance are some factors you should consider for analysing a mutual fund.
A mutual fund’s net asset value or NAV is calculated daily based on the value of all underlying securities after deducting all liabilities and factoring in expenses.
NAV = (Assets – liabilities – expenses)/ (number of outstanding units)
The assets of a mutual fund include equities, debt securities and cash. The NAV depends on the change in the value of the assets. If the value of assets goes up, NAV also goes up and vice versa.
Let’s understand this with an example. If the value of underlying assets in a mutual fund is Rs 100,000, the liabilities are Rs 5,000, expenses are 2%, and the outstanding units are 2,500. Then the NAV of the fund can be calculated using the above formula.
NAV = (100000-5000-2000)/2500
NAV = 37.2
Suppose the value of the assets goes up to Rs 105,000 the next day, then the NAV will also go up to Rs 39.1 ((105000-5000-2100)/2500).
Alternatively, if the value of the assets goes down to Rs 97,500, then the NAV will also go down to Rs 36.2 ((97500-5000-1950)/2500).
Hence the value of the NAV will depend on the value of the underlying assets.
Though NAV data is released daily, you might want to know at what price you were allotted mutual fund units. Then you can calculate it using the formula below.
NAV = Investment amount/number of units
Let’s say you invested Rs 300,000 in a mutual fund and were allotted 3000 units. Then the NAV at which you were allotted is Rs 100.
The NAV of a mutual fund is of the least importance to investors. By just looking at the NAV of the fund, it is difficult to determine whether it is good or bad. Moreover, it doesn’t matter whether the fund you choose has a lower or higher NAV. What matters is how the mutual fund performed during a certain time period and how much your investment value has appreciated.
Let’s take an example of two identical mutual funds that have the same portfolio and similar returns but different NAVs. If an investor invests Rs 10,000 in both funds, let’s see how their value changes after a year.
| Fund A | Fund B | |
| NAV at the beginning of the year | Rs 10 | Rs 100 |
| Vale of the investment at the beginning of the year | Rs 10,000 | Rs 10,000 |
| Units | 1000 | 100 |
| Return in one year | 10% | 10% |
| NAV at the end of the year | 11 | 110 |
| Vale of the investment at the end of the year | Rs 11,000 | Rs 11,000 |
Here the value of both the funds at the end of one year is the same despite having a huge difference in the NAV. Therefore, you shouldn’t check the NAV of the fund while investing. Instead, check for the fund’s historical performance, quality of the portfolio, fund manager’s experience, and investment strategy.
NAV is the per unit value of a mutual fund. As mentioned earlier, it is the price at which mutual fund units are bought and sold. It is calculated as per unit value. By looking at the NAV, it is difficult to say whether a fund is good or bad.
On the other hand, AUM or assets under management is the total assets and cash reserves a fund manages at a point in time. Unlike NAV, AUM is not calculated on a per unit basis. If a fund’s AUM is high, its credibility is high as it has more investors. Hence it is essential to look at the AUM of the fund before investing in it.
Though the NAV of the fund is the basis of which you will be allotted mutual fund units, it’s of the least importance. Never select a fund based on its NAV alone. Instead, it would be best if you looked at the AUM of the fund, consistency in its historical performance, and quality of the portfolio.
A mutual fund’s performance is not affected by a higher or lower NAV. Hence it doesn’t matter whether you choose a fund with a higher or lower NAV. What matters is the fund’s performance over the years and how the growth in the NAV has increased the value of your investment.
NAV is calculated daily. As per SEBI regulations, it must be updated on the fund’s website by 11 pm every day.
The NAV of a fund depends on its performance. A fund that is performing better will have a higher NAV than its peers. However, a fund with a high NAV will not guarantee returns. Moreover, it doesn’t mean a fund with a low NAV is not performing well. Choosing a fund based on its NAV is foolish. Instead, choose a fund based on its performance and portfolio.
The NAV of a mutual fund is very different from the share price of a stock. NAV is the unit price of a mutual fund and is calculated based on the underlying assets. In contrast, the share price is the unit value of a company. Its value is affected by the company’s market value which depends on market demand and supply. A mutual fund’s NAV doesn’t fluctuate based on market demand and supply.
