Things You Need To Know About Mutual Fund NAV

27 May, 2024

Synopsis

• NAV is the price per unit of a mutual fund, calculated by dividing the market value of the fund's assets minus liabilities by the number of units.

• If a fund has ₹100 crore in assets and ₹2 crore in liabilities with 5 crore units, the NAV is ₹19.6.

• For open-ended funds, NAV is calculated daily based on market prices and posted on fund house websites and the AMFI website by 9 p.m.

• The NAV on the day you buy determines the cost of units. For SIPs, different NAVs each month mean you get varying units, which helps balance market ups and downs.
  
  

In a T20 tournament, you bet on players after judging their performances. You look at their strike rate, averages and economy rates. But how do you judge a mutual fund scheme before investing in it? Especially when there are so many mutual fund houses with many schemes. As an investor, one of the key parameters you should look at while selecting a mutual fund scheme is its Net Asset Value (NAV). Now you may ask what is NAV and how and why it is relevant to me. Let us understand the concept of NAV and how to calculate NAV of mutual funds.

What is Net Asset Value (NAV)?

NAV or Net Asset Value refers to the market value of the assets held by a mutual fund scheme per unit. It is the price at which the units of a mutual fund can be bought or sold on a specific date. The NAV is calculated by deducting the liabilities (expenses and fees) from the scheme's total assets and dividing this by the number of outstanding units. The following formula denotes it:

NAV = (Market Value of Scheme's Assets - Liabilities) / Number of Outstanding Units

NAV gives you an idea of the value of your investment in the mutual fund scheme. Let's understand How to calculate nav of mutual fund with example:

• The total assets under a scheme are worth ₹100 crore

• The liabilities amount to ₹2 crore

• There are 5 crore units outstanding under the scheme

Therefore, the NAV of the scheme will be calculated as:

(100 - 2) / 5 = ₹19.6

So, if you hold 1,000 units of this scheme, the value of your investment is 1,000 * ₹19.6 = ₹19,600

The NAV fluctuates daily as the prices of the investments held by the fund rise or fall.

How Do You Calculate Net Asset Value?

The NAV calculation seems simple mathematically, but how is it derived daily? Here is how to calculate net asset value:

• Asset valuation: The fund house will first calculate the value of the scheme's asset, which includes stocks, bonds, cash, etc. The valuation is done at the closing market prices for listed securities like equities. Unlisted instruments are valued as per standard valuation norms.

• Determining liabilities: Expenses like management fees, operational costs, marketing expenses and taxes are accounted as liabilities.

• Calculating NAV: With the asset value and liabilities, the NAV is calculated using the earlier formula.

• Frequency: The NAV is calculated on all business days after the market hours for open-ended schemes. For closed-ended funds, the NAV may be declared weekly or monthly.

• Declaration: All fund houses declare the NAV of schemes on their websites and the AMFI website by 9 pm on business days.

Instead of just the NAV, analysing the NAV trend over time will give you a better sense of the scheme's performance.

How is NAV Relevant When Investing in Mutual Funds?

While evaluating existing schemes, the NAV trend acts as an important historical indicator. But how does NAV matter when you are investing in a mutual fund?

Here are two aspects for investors to note:

• NAV on the Purchase Date Determines the Cost
  
  

  • When investing a lumpsum in a mutual fund, units are allotted based on the NAV of the day funds are realised into the scheme's account before the cut-off time.

  • For example, if you invest ₹1 lakh when the NAV is ₹25, you will receive 4000 units (₹1,00,000 / ₹25). If the NAV is higher when you invest, your purchase cost will be higher for the same investment amount.

  • If you plan to invest a big amount at once, keep an eye on the stock market performance and try to put your money in the fund’s price, known as NAV, when it is low. But be careful not to make decisions based only on the fund’s daily price, especially when the stock market is active, and the prices aren’t showing the full picture.
    
    

• For SIPs, Varying NAVs Mean Change in Units Allocated
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  • In a Systematic Investment Plan (SIP), you invest a fixed amount regularly, say monthly or quarterly. Your investment will translate into varying units depending on the NAV when each instalment is processed.

  • For example, if you invest ₹5,000 monthly in a scheme:

    • Month 1 - NAV is ₹20 - Units allotted - 5000/20 = 250

    • Month 2 - NAV is ₹22 - Units allotted - 5000/22 = 227

  • So, with SIP, you automatically buy more units without any effort when the NAV is lower. This 'rupee cost averaging' balances out the impact of market volatility over the long term.

Instead of getting unnerved by NAV changes, focus on investing in line with your investment objectives and time horizon. Maintain a well-diversified portfolio across schemes and fund categories to benefit from long-term mutual fund investing.

To create a well-diversified portfolio, you can download the HDFC Bank SmartWealth App from Playstore/Appstore.

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