A Complete Guide to Understanding NAV in Mutual Funds

Investing in mutual funds has become increasingly popular among investors due to their potential for higher returns and diversification benefits. However, before investing in mutual funds, it is essential to understand various concepts and terms associated with them. One such crucial term is Net Asset Value (NAV). 

In this blog, we will discuss in detail what net asset value is, its significance in mutual fund investments, how it is calculated, and the factors that affect it. Moreover, we will also cover some ways on how to check NAV before making any investment decisions.

What is NAV (Net Asset Value)?

NAV, or Net Asset Value, is the value of a mutual fund’s assets minus the value of its liabilities per share. It is the price at which investors buy and sell shares of the mutual fund. The NAV in mutual fund is calculated at the end of each trading day. 

The NAV reflects the current market value of the mutual fund’s portfolio. It can fluctuate based on changes in the value of the underlying securities held by the fund. Furthermore, it is an important metric for investors to consider when making investment decisions in mutual funds.

Calculation of NAV (Net Asset Value)

The ‘net asset value’ of a mutual fund is calculated by dividing the total value of the fund’s assets by the total number of units outstanding. The formula for calculating the net asset value is as follows:

NAV Formula

Let’s understand how to calculate NAV with the help of an example. Suppose a mutual fund has a total value of assets worth $10 million and liabilities of $1 million. The fund has 1 million units outstanding. To calculate the net asset value of the fund, we would use the above-mentioned net asset formula:

Net Asset Value = ($10 million – $1 million) / 1 million

NAV = $9

Therefore, the NAV of the fund is $9 per unit.

Factors Affecting the NAV Calculation 

There are several factors that can affect the calculation of the net asset value of a mutual fund:

The market value of the assets

The NAV of a mutual fund is calculated based on the market value of the assets held by the fund. If the market value of the assets increases, the net asset value of the fund also increases and vice versa.

Expense ratio

The expense ratio is the fee charged by the mutual fund company to manage the fund. The higher the expense ratio, the lower the net asset value of the fund will be.

Redemption fees

Some mutual funds charge redemption fees when an investor sells their shares. These fees are deducted from the net asset value of the fund. And can reduce the value of an investor’s investment.

Dividends and capital gains

If a mutual fund distributes dividends or realizes capital gains from selling assets, the net asset value of the fund will decrease. This is because these payments are deducted from the value of the fund’s assets.

Sales charges

When investors buy mutual fund shares, they may have to pay a sales charge, also known as a front-end load. This charge is deducted from the NAV of the fund and reduces the value of an investor’s investment.

Fund inflows and outflows

When investors buy or sell mutual fund shares, it affects the amount of assets held by the fund. This can impact the net asset value of the fund, especially if there are large inflows or outflows. If more investors are buying shares than selling them, the fund’s assets will increase. Consequently, the net asset value will go up.

Conversely, if more investors are selling shares than buying them, the fund’s assets will decrease. Consequently, the net asset value will go down.

Significance of NAV in Mutual Fund Investments

The NAV in mutual fund is important because it gives investors an idea of the fund’s performance. It helps investors track the fund’s growth and its returns over a period of time. Additionally, it also reflects the fund manager’s investment strategy and the performance of the underlying assets.

As an Investor, you can use the net asset value to monitor the performance of your investments and to make decisions about buying or selling units of the fund. For instance, if the ‘net asset value’ of a fund has been consistently increasing over a period of time, it may indicate that the fund has been performing well. 

Hence, you may consider buying more units. On the other hand, if the ‘net asset value’ has been declining, it may indicate that the fund is not performing well. Consequently, you may consider selling your units.

NAV in closed-end funds vs open-ended funds

The concept of ‘net asset value’ applies to both closed-end funds and open-ended funds, but there are some differences in how it works in each case.

In closed-end funds, the number of shares is fixed and the trading of shares takes place on a stock exchange like any other stock. The NAV of a closed-end fund is calculated by dividing the total value of the fund’s assets by the total number of shares outstanding. However, the market price of the closed-end fund may differ from its NAV due to supply and demand factors and other market conditions.

On the other hand, in open-ended funds, the number of shares is not fixed and the fund issues and redeems shares on a daily basis. The NAV of an open-ended fund is calculated by dividing the total value of the fund’s assets by the total number of shares outstanding. Unlike closed-end funds, the market price of an open-ended fund is usually equal to its NAV, as the fund’s shares are bought and sold directly from the fund at the NAV price.

Factors Affecting the Net Asset Value

There are several factors that can impact the ‘net asset value’ of a mutual fund. Here are some of the major factors affecting net asset value:

• Market volatility and impact on NAV: Market movements and volatility can impact the value of the underlying assets in a mutual fund. For instance, if the stock market experiences a downturn, even the highest nav mutual fund may decline.

• Expense ratio and its effect on NAV: The expense ratio is the fee charged by the mutual fund company for managing the fund. This fee is subtracted from the assets of the fund before the NAV is calculated. Thus, a higher expense ratio can lower the ‘net asset value’ of the fund.

• Fund inflows and outflows affecting NAV: The inflow and outflow of funds from the mutual fund can impact the NAV. If there are more redemptions than fresh investments, it can lead to a decline even in the highest NAV mutual fund. Conversely, if there are more fresh investments than redemptions, it can lead to an increase in the ‘net asset value’.

Why Should You Consider NAV Before Making Any Investment Decisions?

The ‘net asset value’ is an essential metric that indicates the performance of a mutual fund. Therefore, it’s crucial to pay attention to the NAV in mutual fund before making any investment decisions. Here are some reasons why:

NAV reflects the fund’s performance

The NAV in mutual fund is an indicator of how well the fund has performed over a specific period. A higher net asset value indicates a better-performing fund, while a lower net asset value may indicate a poorly-performing fund.

Helps in comparing different funds

When investing in mutual funds, it’s essential to compare different funds’ performance to make an informed investment decision. The NAV provides an easy way to compare the performance of different funds.

Shows the value of your investment

The ‘net asset value’ represents the value of each unit of the mutual fund. Therefore, by multiplying the NAV by the number of units held, you can determine the current value of your investment.

Affects the cost of investment

The ‘net asset value’ affects the cost of investing in a mutual fund. A higher NAV means the cost per unit is higher, while a lower ‘net asset value’ means the cost per unit is lower. Therefore, paying attention to the NAV can help you make an informed decision about the cost of investment.

How to Check NAV?

You can check mutual fund NAV in various ways:

• Mutual Fund Websites: Most mutual fund companies have websites where you can find the latest NAV of their mutual fund schemes. You can visit the website of the mutual fund company and search for the fund’s latest NAV under the ‘Latest NAV’ section.

• Financial News Websites: Financial news websites provide the latest NAV in mutual fund schemes. You can search for the fund’s name in the search bar and check its current net asset value.

• AMC’s Mobile App: Mutual fund companies have their mobile apps where you can get the latest NAV of their mutual fund schemes. You can download the app from the respective app store and check the fund’s ‘net asset value’ by entering its name.

• Fund Fact Sheets: Fund fact sheets are published by mutual fund companies on a monthly or quarterly basis. They contain important information about the fund, including its latest NAV. You can download the fact sheet of the fund from the mutual fund company’s website and check its latest ‘net asset value’.

What is Considered as a Good NAV?

There is no specific value that can be considered as a good Net Asset Value for mutual funds, as it depends on various factors such as the investment objective, fund category, and investment strategy.

In general, a good NAV is one that is consistent with the investment objectives and aligns with the investor’s risk tolerance, investment horizon, and financial goals.

What is Historic NAV? Should you consider it before making any investment decision? 

Historic NAV refers to the Net Asset Value (NAV) of a mutual fund scheme over a period of time. It provides insights into how the fund has performed in the past and can help investors understand the fund’s investment strategy and performance track record. 

Yes, as an investor you should consider mutual fund NAV history before investing. Because by analyzing the historic ‘net asset value’ of a mutual fund, you can make informed decisions about whether or not to invest in a particular fund, and can also track their own investment performance over time. 

However, it’s important to remember that past performance is not indicative of future results and that investment decisions should be based on a variety of factors beyond just historic NAV.

Final Thoughts 

Net asset value is a crucial factor to consider when investing in mutual funds. It represents the value of a single unit of a fund and reflects the fund’s performance over time. By understanding how net asset value is calculated and the factors that can affect it, you can make informed decisions and achieve your financial goals. So, always keep an eye on NAV and invest wisely!