Mutual Funds

Understanding NAV in Mutual Funds

Created on 04 Mar 2023

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Every sort of investor has a wide range of options when it comes to mutual funds. Investors with a high or low tolerance for risk can readily find mutual fund solutions that fit their needs. So how can investors choose the best form of fund that suits their demands when there are so many possibilities on the market? 

A fund's historical performance is frequently regarded as one of the best predictors of its viability or profitability. A fund that has been continuously performing well and offering respectable returns during market highs or market lows will possess good-quality underlying assets that can survive market trends. Such a fund also shows the fund manager's ability to guide the portfolio through market turbulence and achieve the investor's ultimate objective of wealth growth. Market conditions, the fund house, their investment strategy, etc., are further indicators of the fund's prior performance being in good health.

Many investors tend to just consider a mutual fund's historical performance, but there is something which is equally important for a mutual fund…
It is the NAV.

What is NAV in Mutual Funds?

Investors frequently don't know how to evaluate a mutual fund's performance when making an investment in one. As mutual funds are made up of a variety of securities rather than just one, it is impossible to gauge their performance using just one asset. 

When paired with other considerations like previous performance, risk factors, AUM  (Asset Under Management), etc. The idea of net asset value aids investors in learning more about mutual funds.

The market value per unit of a mutual fund is represented by its net asset value (NAV). It is the price at which investors purchase fund units from a fund house(bid price) and sell them to a fund house(redemption price).

Today, mutual funds invest in a variety of equities and bonds, and the value of the investments held by the scheme can fluctuate daily. Because of this, the NAV of mutual funds fluctuates every day, like stock prices. 

However, there is a significant distinction between shares in the stock market and a mutual fund’s NAV. A mutual fund scheme's net asset value (NAV) is determined near the conclusion of each day when the markets are still open. Hence the NAV only changes once every day.

On the other hand, the price of equity shares fluctuates in real-time when shares are traded during market hours.

How to calculate NAV of a Mutual fund?

The formula for calculating the NAV of mutual funds is as follows:

NAV = (Total Assets – Total Liabilities) / Total number of outstanding units
NAV = (Net Assets of a Mutual Fund) / Total number of outstanding units

The sum of all the units provided by the mutual fund to all of its investors is the total number of outstanding units, which is used in the formula above to calculate NAV. 
The net asset value of mutual funds only fluctuates once every day since the NAV calculation formula employs the entire assets and total liabilities of a mutual fund calculated at the end of each day.

Interpretation of NAV in Mutual Funds

The entire value of a fund's assets, the total amount of its liabilities, and the number of outstanding units are the three parameters that have an impact on the mutual fund NAV, as you can see from the above formula used to determine net asset value.

The NAV of a mutual fund will therefore rise if and when the following conditions are met:

  • If the fund's investments have a higher value. 
  • There is a reduction in the mutual fund's overall liabilities.
  • The scheme's total number of outstanding units declines.

As a result, the fund's NAV will drop if the situation opposite to what was stated above occurs. An increase in NAV often signals strong performance from the mutual fund, which increases investor returns. An investor may experience a loss if the fund's NAV declines, which signals bad performance.

How is NAV relevant for investors?

When the NAV of a fund is low, investors who try to time the market typically want to make lump sum investments and redeem when the NAV of the fund increases. It is anticipated that the profit from the investment will be maximized by the difference between the selling NAV and the purchase NAV. 

Although this is theoretically possible, it is exceedingly challenging to put into practice due to the unpredictable nature of market fluctuations and changes in mutual fund NAV.

So, investors should focus on being methodical with their investments and staying involved over the long term rather than only paying attention to a mutual fund's NAV and trying to time the market. 

Investors can take advantage of rupee cost averaging, which lessens the impact of fluctuations in NAV on the entire investment, by making systematic and routine investments, such as through a systematic investment plan (SIP).

Long-term mutual fund investments, particularly equity-oriented ones, will also have more time to grow. The investor will then be able to take full advantage of the power of compounding.

Role of NAV in the performance of a mutual fund 

Any mutual fund scheme's historical performance can be monitored using the NAV of the funds. Your results are not impacted by the NAV. For instance, a high or low NAV does not necessarily result in higher or worse returns.

Any fund's growth or degrowth in NAV can be studied to determine the fund's growth trend and aid in decision-making. For instance, if a fund's NAV climbed from ₹10 five years ago to ₹150 today, that may indicate that the fund's AUM has grown and that more investors have confidence in the fund management.

Other than this, there is no connection between the fund's performance and its NAV.

An open-ended scheme has greater relevance for NAV than a closed-ended one because the former permits unit purchases and sales at any time.

Because the NAV value will vary every day, the timing at which you buy or sell is important. So, you must invest before the cut-off time in order to receive the end-of-day NAV for a specific business day.

The majority of mutual fund schemes have a 3 PM purchase transaction deadline. Liquid fund schemes, however, are not subject to this scheduling. This indicates that if you invest up until 3:00 PM, you will receive the day's NAV.

If your application is received after the deadline, the mutual fund company will still accept it. However in these situations, you will receive the NAV for the following working day. The cut-off time guidelines also apply to redemptions.

Which is better, higher or lower NAV?

The NAV only represents the fund's fundamental value. According to financial experts, investors don't care whether the NAV is higher or lower.

Consider the scenario when you are investing in two plans with identical portfolios. One scheme has a higher NAV because it has been around for a while.

The NAV of the other scheme is lower because it is more recent. The investor would receive a greater number of units in the scheme with a lower NAV and fewer units in the scheme with a higher NAV as a result.

But, because their respective portfolios are similar, none would experience a difference in returns from the scheme's investment appreciation or depreciation.

When is NAV updated?

Daily NAV disclosure is needed from mutual funds. The NAV per unit of all mutual fund schemes must be made available on the AMFI and mutual fund websites by 11 p.m. on the same day. The Fund of Funds may make changes to the data up until 10 a.m. on the next business day.

Mutual funds do not continuously announce their NAVs, in contrast to equities, whose price is determined by the market and fluctuates minute by minute.

Instead, in compliance with SEBI Mutual Fund Rules, NAVs of all mutual fund schemes are disclosed at the conclusion of the trading day after markets close.

Additionally, pursuant to SEBI Mutual Fund Regulations, the mutual fund units are only allocated at prospective NAV, or the NAV that would be announced at the end of the day based on the closing market value of the securities held in the relevant schemes, for all mutual fund schemes other than liquid fund schemes.

The Bottom Line 

The mutual fund's share price per share is known as the NAV. Unlike a stock price, it won't fluctuate throughout the day; instead, it refreshes at the conclusion of each trading day. The price of a stock, on the other hand, changes constantly.

Mutual funds are like a basket that contains a large number of shares from several companies. So in assessing the performance of a mutual fund, Net Asset Value (NAV) plays a very important role.

Investors should concentrate on being meticulous with their investments and keeping active over the long-term timeframe because mutual fund net asset values fluctuate once per day.

So now, once we know what NAV is and its importance for mutual funds, we all can believe when we say that “Mutual funds sahi hai!”

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Shreni Sharma

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Shreni is pursuing PGPM at ICFAI Business School Pune. Shreni is a sports fanatic, loves to read, an avid Potterhead, and most importantly, a finance enthusiast. She wants to explore every aspect of life to the fullest and push herself every day to achieve her best self. 


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