The Net Asset Value (NAV) is the per-unit market value of all the securities held by the mutual fund scheme. The net asset value formula is the total assets minus total liabilities and then dividing the net value by the total outstanding units.
The NAV is only the book value of the scheme, an investor must always refer to the past performance of the scheme before investing.
Mutual funds pool the money invested by individual investors, build a portfolio as per the needs of the investors, and re-invest the amount collected in the security market. In exchange for the investment, the investors are allocated units of the mutual fund scheme.
The net asset value is the per-unit market value of all the securities held by the mutual fund scheme. Since the amount collected from investors is invested in securities, a mutual fund always holds assets under the scheme and the investors hold a certain amount of units of mutual funds.
To know the Net Asset Value, we need to first know the market value of all the securities, the liabilities associated with the scheme, and then the number of units issued. The mutual fund NAVs will be the total asset minus total liabilities. NAV calculation is at a per-unit level. So, the net value to be divided by the total units. This is the value per mutual fund unit.
The market value of the underlying assets or securities changes every day and accordingly mutual fund NAVs also change daily. The mutual fund houses are mandatorily required to disclose the Net Asset Value on a daily or weekly basis, depending on the type of mutual fund scheme. The open-ended schemes are required to disclose the NAV on all working days while the close-ended schemes are required to disclose weekly.
The Net Asset Value calculation formula is:
NAV = [Assets – (Liabilities + Expenses)] / Number of units outstanding
Where the assets include the value of securities and liquid cash. The securities in which the scheme has invested include both equity, debentures, bonds, bills of exchange, commercial paper. It also includes the interest accrued and dividend earned.
The liabilities and expenses include the money payable, interest payable, fund management expenses.
It is not advisable to evaluate which mutual funds to invest only on the basis of the Net Asset Value. A lower NAV does not mean the mutual fund is cheap and the investor is in a gaining position by buying at a lower price or lower NAV. This is not like the share price or market price of shares listed on the stock market.
This only shows the current value of the units. A higher Net Asset Value only reflects the positive performance of the scheme and that it has been issued a long time before. Also, a higher NAV of a scheme means an investor will receive a lower number of units and a lower NAV means an investor receives a higher number of units
Mr. Arun invests in 2 different schemes, Scheme-A and Scheme-B. He invests Rs 1 lakh in both the schemes.
NAV of Scheme-A is Rs 10
NAV of Scheme-B is Rs 50
Units to be allocated
Scheme-A: 10000 units (Rs 100,000 / 10)
Scheme-A: 2000 units (Rs 100,000 / 50)
Returns earned in both the schemes is 10% after a month
Here the revised NAV per unit is Rs 11 for Scheme-A and Rs 55 for Scheme-B. The initial amount invested for both the schemes is Rs 1 lakh. The only difference is the number of units allocated, the units allocated in Scheme-A is higher than Scheme-B. But the NAV and the return for both the schemes are the same. So, the role of NAV is not the only factor to measure the performance of the fund.
Mutual fund NAVs are the book value of the scheme. When investing in any scheme, an investor must check the past performance of the scheme. Also, an investor must look at the returns earned by the fund over the years.
Let us understand the calculation through the illustration given below:
The assets, liabilities and the total units are listed in the below mentioned below. This illustration clears the formula and Net Asset Value calculation concept.
|Particulars||Amount (Rs)||Asset/ Liability|
|Cash and cash equivalent||300,000||Asset|
|Total Liabilities and expenses||450,000|
|Total Assets (A)||1,050,000|
|Total Liabilities and expenses (B)||450,000|
|Net Asset value = (A – B)||600,000|
|Total units outstanding||1000|
|NAV per unit||600 per unit|
The NAV is calculated every day after the market closes either by the mutual fund house itself or the accounting firm appointed by the fund house.
As the prices of the underlying assets change very frequently in a day, the calculation of NAV is possible only once the market closes.
Hence, the calculation is done based on the closing price of the underlying assets like securities, debt instruments.
The underlying assets are valued at a closing price but the value of few assets and liabilities is not affected by the market. These could be the expenses payable, balance in the bank account, short-term or long-term liabilities.
Many investors assume Net Asset Value NAV and the market price to be the same and both the concepts are very different. So when a mutual fund has a lower NAV many investors assume it to be cheaper and a good opportunity to invest and this assumption is incorrect. Let us understand the role of NAV, why is this assumption wrong, and clear the concept.
When any company is listed on the stock exchange, its shares are made available to the investors to buy. The cost of the shares is listed on the stock exchange that an investor can pay and buy the shares. This is the market price of the shares. This market price is a factor of many variables that drive the market price.
The variables are the demand and supply ratio of the shares, the company’s potential in the future, past performance. So the share market price is a pure price affected by multiple factors.
There is no such concept or listing on the stock exchange for mutual funds and its units. The units of mutual funds are bought at book value or net asset value. The net asset value is the total value given to the mutual funds at the day end and the close of the market.
Now, we already know the difference between the market price and the mutual fund NAVs
Hence, an investor when making any decision on which mutual funds to invest in, he/ she must consider the past performance, the type of the scheme, expense ratio, credit risk score, etc as mutual funds guide
Hence, an investor when making any decision to buy or sell units of mutual funds, he/ she must consider the past performance of the fund and the type of the scheme.
This scheme does not have a fixed maturity period, an investor can buy or sell at the NAV-related price. Here, the NAV is very important.
These schemes have a fixed maturity period and the investors can only invest during the initial issue days open for subscription, after which you can only buy or sell the already issued units.
Here, the market price of the units will vary from the NAV due to demand-supply factors, market factors.
This scheme is a combination of both schemes. They may be traded on stock exchanges or be open for sale/redemption during predetermined intervals at NAV-based prices.
A mutual fund has a cut-off time investment and redemption. The intent is not to restrict the investment or redemption but to decide on the NAV at which the mutual fund unit will be allocated or redeemed. So, the allotment of units depends on the time of application submission and money transferred to the fund house.
|Type of fund||Cut-off time||Scenario||NAV|
|Liquid Mutual Fund||1:30 P.M.||Application submitted and money transferred before 1:30 p.m.||NAV of the previous day|
|Liquid Mutual Fund||1:30 P.M.||Application submitted and money transferred after 1:30 p.m.||NAV of the same day|
|Liquid Mutual Fund||1:30 P.M.||Application submitted before 1:30 p.m. and money not transferred||Not eligible for NAV of the previous day|
|Debt Mutual Fund,Equity Mutual Fund||3 P.M.||Application submitted before 3 p.m.||NAV of the same day|
|Debt Mutual Fund, Equity Mutual Fund||3 P.M.||Application submitted after 3 p.m.||NAV of the next day|
So, the investment timing affects the investors but not always. If an investor is investing in the long-term, the timing would not affect the investment in the long run. If an investor is investing for a very short-term, the timing may affect the investment marginally or heavily depending on the NAV of the same day, the previous day, and the next day.
|Type of fund||Cut-off time||Scenario||NAV|
|Liquid Mutual Fund||12:30 P.M.||Application submitted and money transferred before 12:30 p.m.||NAV of the previous day|
|Liquid Mutual Fund||12:30 P.M.||Application submitted and money transferred after 12:30 p.m.||NAV of the same day|
|Liquid Mutual Fund||12:30 P.M.||Application submitted before 12:30 p.m. and money not transferred.||Not eligible for NAV of the previous day|
|Debt Mutual Fund, Equity Mutual Fund||1 P.M.||Application submitted before 1 p.m.||NAV of the same day|
|Debt Mutual Fund, Equity Mutual Fund||1 P.M.||Application submitted after 1 p.m.||NAV of the next day|
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