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Net Asset Value (NAV): Learn about its Meaning, How is calculated and importance

Net Asset Value (NAV)
net value value (nav)

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.

What is NAV?

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.

What is the Net Asset Value Formula?

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.

How is NAV Relevant to Investors?

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

Let us understand the concept with the help of an illustration

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.

How is Net Asset Value calculated?

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.

ParticularsAmount (Rs)Asset/ Liability
Securities500,000Asset
Cash and cash equivalent300,000Asset
Receivables200,000Asset
Accrued Interest50,000Asset
Total Assets1,050,000
Short-term liabilities200,000Liability
Long-term liabilities150,000Liability
Accrued Expenses100,000Expense
Total Liabilities and expenses450,000
ParticularsAmount (Rs)
Total Assets (A)1,050,000
Total Liabilities and expenses (B)450,000
Net Asset value = (A – B)600,000
Total units outstanding1000
NAV per unit600 per unit

Few highlights about NAV calculation:

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.

The Difference Between Net Asset Value & Market Price

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.

Role of Net Asset Value in the Performance of a Fund

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.

Open-Ended 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.

Close-Ended Scheme

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.

Interval Scheme

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.

How Does Investment-Timing Affect the Net Asset Value (NAV)?

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.

There are a different cut-off times for liquid mutual funds, debt mutual funds, and equity mutual funds.

Type of fundCut-off timeScenarioNAV
Liquid Mutual Fund1:30 P.M.Application submitted and money transferred before 1:30 p.m.NAV of the previous day
Liquid Mutual Fund1:30 P.M.Application submitted and money transferred after 1:30 p.m.NAV of the same day
Liquid Mutual Fund1:30 P.M.Application submitted before 1:30 p.m. and money not transferredNot eligible for NAV of the previous day
Debt Mutual Fund,Equity Mutual Fund3 P.M.Application submitted before 3 p.m.NAV of the same day
Debt Mutual Fund, Equity Mutual Fund3 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.

The cut-off time for mutual funds has been changed from 7th April 2020 till 17th April 2020 due to RBI’s reduced trading hours for money market and forex market.
Type of fundCut-off timeScenarioNAV
Liquid Mutual Fund12:30 P.M.Application submitted and money transferred before 12:30 p.m.NAV of the previous day
Liquid Mutual Fund12:30 P.M.Application submitted and money transferred after 12:30 p.m.NAV of the same day
Liquid Mutual Fund12:30 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 Fund1 P.M.Application submitted before 1 p.m.NAV of the same day
Debt Mutual Fund, Equity Mutual Fund1 P.M.Application submitted after 1 p.m.NAV of the next day

How to estimate the returns from mutual funds?

You can use Scripbox’s mutual fund calculators to estimate the returns from SIP or lump sum investments.  Mutual fund calculators help you in evaluating whether the fund is generating returns in line with expectations and investment goals. It provides mutual funds guide to investors. 

Frequently Asked Questions

What is NAV in SIP?

The NAV is calculated for the mutual fund and SIP is just a disciplined way to invest in mutual funds. There is no NAV for SIP. The NAV of the mutual fund is calculated for every installment of the SIP and the units are allocated.

Is high NAV Good?

No, a high NAV would mean the value of the scheme is high but it does not necessarily mean the scheme is performing better. Hence, an investor must consider the fund performance in the past to evaluate the fund performance of the scheme.

What Affects Net Asset Value (NAV)?

The net asset value is affected by the total value of the underlying assets at the closure of the market, the income accrued, the total liabilities, and the expenses accrued.

Does NAV change daily?

Yes, the NAV of the scheme changes daily. The NAV is calculated daily after the market closes and published by the fund house or the accounting firm appointed by the fund house.

What does a negative NAV mean?

A negative NAV means the total liabilities are higher than the total assets of the mutual fund.

What is the NAV Impact?

The mutual fund units are allocated at the NAV of the mutual fund. Therefore, a higher NAV would mean a lower number of units allocated and a lower NAV would mean a higher number of units allocated.

Does the NAV of a mutual fund matter?

Yes, the NAV of a mutual fund matters. It is the NAV on the basis of which the units are allocated but it is not the only decisive factor to evaluate any mutual fund scheme.

Published on April 8, 2020