What is NAV?
Understanding NAV In Mutual Fund Schemes
NAV or Net Asset Value is one of the most talked about terms in the world of mutual funds. Understanding the term does involve a little bit of math but that shouldn't stop you from learning all about it. Here's a detailed guide to help you understand more about NAV and why it matters to your mutual funds investments.
Net Asset Value (NAV) - What Is It?
Net Asset Value is the market value of all securities held by the mutual fund scheme. NAV is the price at which investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund company.
The NAV is determined on a daily basis and it is calculated at the end of the day based on the closing price of all the securities that the respective mutual fund schemes own after making proper adjustments.
How To Calculate Net Asset Value?
Calculating NAV is simple and you can do it in your mind if you are one of those math wizards. If you are not, you can do so with the help of the calculator app on your phone.
The formula to calculate NAV is
NAV = (Total Assets – Total Liabilities) / Total Number of Outstanding Units
Let's understand this further with an example. A mutual fund company (AMC) offers a new scheme for investors via a new fund offering (NFO). In an NFO, the units of a scheme are priced at ₹10. So, let's assume that the AMC mobilizes ₹1000 crores during the NFO from different investors. Since the issue price is fixed at ₹10 for the NFO subscribers, the AMC allotted units to the investors based on the total amount mobilized.
If we take the above example, the AMC has issued 100 crore units (₹1000 crores / ₹10 NAV). These units will be allotted proportionately to investors based on their respective investment amounts. So, if you invested ₹10,000 in this NFO, you will receive 1000 units.
Now, let's take this example a step further. The amount that is mobilized in the NFO will be invested in several securities as per the scheme mandate. The important thing to note here is that the market prices of these securities will change on a daily basis.
If the portfolio asset value of the scheme increases from ₹1000 crores to ₹1050 crores. So, now the scheme NAV will be ₹10.5 (₹1050 crores / 100 crore units). Hence, your investment of ₹10,000 will now be worth ₹10,500 (₹1000 units x 10.5 NAV).
Mutual Funds And NAV
Here’s how NAV is related to mutual funds and why it is important:
- NAV is used to figure out the price at which investors can buy or sell mutual fund shares
- Investors can track the NAV over time to analyse the performance of the mutual fund.
- Mutual fund shares are bought and sold at the NAV price. When investors purchase shares, they do so at the NAV calculated at the end of the trading day. Similarly, when investors redeem shares, they receive the NAV calculated at the end of the day.
- Distributions such as dividends and capital gains affect the NAV. When a mutual fund pays out dividends or capital gains, the NAV decreases by the amount of the distribution.
- The expenses of running the mutual fund, like management fees and operating costs, are deducted from the fund's assets. This affects the NAV.
Impact Of AUM & Expense Ratio In NAV
Both Assets Under Management (AUM) and the expense ratio affect the NAV of a mutual fund considerably. Here’s how each of the factors affects NAV
Assets Under Management
- Larger AUM can lead to economies of scale. This means that the fixed costs of managing the fund are spread over a large asset base, which can potentially reduce the expense ratio. Lower costs per unit of investment can help maintain or even increase the NAV.
- A larger AUM offers more liquidity, resulting in a more stable NAV, as large transactions are less likely to cause price fluctuations in the fund's holdings.
- Funds with larger AUM may have access to a broader range of investment opportunities. These opportunities can boost the fund's performance, positively impacting the NAV.
Expense Ratio
- Higher expense ratios mean a greater portion of the fund's returns is consumed by fees, leading to a lower NAV.
- Over time, high expense ratios can drag down a fund's performance to a great extent. This lower performance is reflected in slower growth or even a decline in NAV compared to funds with lower expense ratios.
Why Is It Important For Investors To Learn About NAVs?
After reading the above example, you must be thinking that buying a mutual fund, which has a low NAV, will do good for your portfolio. But this is not the case. The truth is that NAV does not reflect the future prospectus of the mutual fund scheme. It is just the price at which you may buy or redeem units of the mutual fund scheme.
So, a mutual fund scheme's NAV is not an appropriate indicator of its performance. To gain a better understanding of a fund, you should look at the scheme's historical performance and total expense ratio among many other parameters, as this will help you in making better investment decisions.
Investment Timings & NAV
In stock markets, the cut-off timings restrict the purchase and sale of stocks after a particular time. However, in mutual funds, cut-off timings determine which day's NAV will be applicable to your trade.
As we all know, the performance of a mutual fund scheme is indicated via a change in its NAV. Since the market value of securities keeps changing, the NAV of mutual funds that invest in these securities also changes every day.
The NAV of all mutual fund schemes is declared at the end of the trading day after markets are closed. The NAV of a scheme establishes the price at which the units will be purchased or redeemed. The allotment of NAV depends on the timing of the purchase or redemption request.
Here are the cut-off timings for mutual fund schemes.
In The End…
NAV is an important term to know when you are investing in mutual funds. The one thing you should keep in mind is that NAV only determines how many units you get allotted for your investments. So, the appreciation of NAV is more important than NAV itself.
NAV alone shouldn’t determine which funds you should be investing your money in. You should also consider the fund’s past performance, objectives, and the amount of risk involved in the fund. You should also check whether the mutual fund aligns with your investment goals and risk profile. We hope this guide helps you understand how NAV works and how it is calculated.
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| Type Of Schemes | Type Of Transaction | Cut-Off Timings |
|---|---|---|
| Liquid Funds / Overnight Funds | Subscription (including Switch-in from other schemes) | 1.30 P.M. |
| Liquid Funds / Overnight Funds | Redemption (including Switch-in from other schemes) | 3 P.M. |
| All other schemes (other than Liquid Funds / Overnight Funds) | Subscription (including Switch-in from other schemes) | 3 P.M. |
| All other schemes (other than Liquid Funds / Overnight Funds) | Redemption (including Switch-in from other schemes) | 3 P.M. |
| Time Of Receipt Of Transaction And Money | Applicable NAV |
|---|---|
| Where the purchase transaction is received up to the cut-off time of 3 P.M. on a business day & funds for the entire amount of subscription/purchase is available for utilization up to 3 P.M. on the same business day | NAV of the same business day shall be applicable |
| Where the purchase transaction is received up to the cut-off time of 3 P.M. on a business day & funds for the entire amount of subscription/purchase is available for utilization after 3 P.M. on that business day or on a subsequent business day | NAV of the subsequent Business Day on which the funds are available for utilization prior to 3 P.M. shall be applicable |
| Where the transaction is received AFTER the cut-off time of 3 P.M. on a business day & funds for the entire amount of subscription/purchase are available for utilization upto 3.00 P.M. on the same business day | NAV of subsequent business day shall be applicable |
| Where the application is received after cut-off time of 3 P.M. on a business day & funds for the entire amount of subscription/purchase are available for utilization after 3 P.M. on the same Business Day or subsequent business day | NAV of the subsequent business day on which fund realized prior to 3 P.M. shall be applicable |
FAQs
Which AMC has the highest assets under management?
SBI Mutual Fund is the AMC with the highest AUM of ₹919,519.99 crore (as of 31st March 2024).
How to check the NAV of a mutual fund?
You can check the NAV of a mutual fund by visiting the AMC’s website or mutual fund apps. You will be provided with details regarding the mutual fund transaction history, balance, and more using the folio number. You can also visit the AMC’s office to check the mutual fund statement by folio number.
What affects the NAV of a mutual fund?
The NAV of a mutual fund is affected by many factors, including the market value of holdings, expenses, income and capital gains, buying and selling of fund shares, market conditions, and currency fluctuations.
Should you invest in a mutual fund with a high NAV?
Many people feel that a higher NAV will result in higher returns. However, a higher NAV does not always imply a better-performing mutual fund. It might indicate that the fund has been operating for a longer period of time or that the fund has previously performed well. At the same time, it has no bearing on how the fund will perform in the future.
What is a good NAV for a mutual fund?
There isn’t a good or bad NAV for a mutual fund because NAV simply reflects the current price per share of the fund’s holdings. It is important to consider it in the context of other factors like expense ratios, performance history, investment strategy, and your own investment objectives.
Should I invest when the NAV is low or high?
A lower NAV doesn’t mean a fund is cheaper or a better value. On the other hand, a higher NAV doesn’t mean a fund is more expensive or less attractive. Instead, focus on the fund’s performance history, investment strategy, and how it aligns with your financial goals and risk tolerance. In this way, you will be able to find a suitable mutual fund for your needs.