Net Asset Value (NAV)

What is NAV in Mutual Funds?

The NAV or 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.

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.

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.

NAV 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 to Calculate NAV of Mutual Fund with Example?

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
Securities	500,000	Asset
Cash and cash equivalent	300,000	Asset
Receivables	200,000	Asset
Accrued Interest	50,000	Asset
Total Assets	1,050,000
Short-term liabilities	200,000	Liability
Long-term liabilities	150,000	Liability
Accrued Expenses	100,000	Expense
Total Liabilities and expenses	450,000

Particulars	Amount (Rs)
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

Mutual Fund NAV Calculation Highlights:

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.

Difference Between Net Asset Value NAV & 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 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.

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 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

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. 

Which day is NAV applicable?

A person can invest in mutual funds on any business day but may not get the same-day NAV. The NAV may be of the previous day, same day or next day. This depends on the time of application submitted and the transfer of money to the fund house. This is the cut-off time in mutual funds, which varies for different funds. i.e. liquid funds, debt funds and equity funds

For liquid funds – the cut off timing is 1.30 pm. Suppose the investors submit the application and transfer the fund before 1.30 pm. In that case, the NAV of the previous day is applicable. If the funds are not transferred before 1.30 pm, the NAV of the same day is applicable when the fund house has received the funds.
For equity and debt funds – the cut off timing is 3 pm. If the investors apply 3 pm, the same day NAV is applicable. If the application is submitted after 3 pm, then the next day, NAV is applicable. The only exception to this rule is that if the investment amount is above Rs. 2 lakh, then both application and transfer of funds should happen before the cut off timing for the same day NAV.

Therefore, cut off timing is not very important if the investment amount is small and if the investor is planning to invest for a long time. However, it matters to investors who are investing for a short period and investing a large amount of money as one or two per cent can make a lot of difference to these investors.

Read also about the Net Investment

Frequently Asked Questions