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What is NAV? – Net Asset Value & its importance in Mutual Funds

Whether you are a beginner mutual fund investor or an experienced one, you inevitably come across the abbreviated term ‘NAV’. You may try hard to keep the investment jargon at bay, but this one term seems to crop up a lot. For example, when you buy and sell mutual funds, you need to know what is NAV and NAV importance in a mutual fund. In this article, we discuss everything there is to know about NAV including what is NAV and how is it calculated.


What is NAV?

NAV stands for Net Asset Value of a fund. Based on this net asset value, the asset management company and investors both can keep a count on the number of units the investors hold in a fund. Net asset value denotes the price of each unit of a mutual fund.

Now that we know what is NAV, let us see what is NAV Value in Mutual Funds.


What is NAV Value in Mutual Funds?
The NAV per unit is the market value of securities divided by the total number of units of the scheme. To put simply, the performance of a particular mutual fund scheme is denoted by its NAV. Mutual funds collect money from several investors and invest it in the securities market. Since the market value of securities fluctuates every day, NAV of a mutual fund scheme also changes on a day to day basis.

Generally, mutual funds begin with a unit cost of Rs. 10 and as the fund’s assets under the management grow, the price keeps rising.


What is NAV and How Is It Calculated?

NAV computation is undertaken once at the end of each trading day on the basis of the closing market prices of the portfolio’s securities. Let us understand what is NAV and how is it calculated in this section.

• General Net Asset Value Calculation
Suppose, a mutual fund scheme has a NAV of Rs. 500. So, if you want to buy one unit of that mutual fund you will need to pay Rs. 500 for it. Conversely, assume you invest Rs. 5,000 in a mutual fund scheme which has an NAV of Rs. 500. It will allow you to buy 10 units of that fund.

• Daily NAV Calculation
Once the market closes at 3:30 p.m., all mutual fund companies estimate the worth of their portfolios every day. The market opens the next day with the previous day’s closing share prices. The fund house or asset management company subtract every payable to calculate the NAV of the day. The asset value of the fund is arrived at after deducting the daily expenses to manage a fund.
The day’s cost per unit is calculated by dividing the total asset value by the number of units issued so far. Since most of the funds are open-ended, fresh withdrawals and new investments can impact the units. If the fund manager deems fit, they can sell some shares or put in an additional sum.


Is There Any Myth About NAV?
Many investors think that if they invest in a fund with lower NAV, they have a better scope for a price increase and those that already have a higher NAV may not have the scope for a price increase. This compels them to invest in a scheme with lesser NAV.

For example, you get units allotted at NAV 10 if you invest in NFO. But, if you invest in a fund which was launched 3 years ago and has an NAV of 50, you will earn lesser profits comparatively. This is not true.

The performance of any mutual fund is dependent upon the performance of the securities involved in the portfolio. Plus, NAV is a combination of costs such as management fees, distribution fees and the expense ratio of the fund manager. The chances of growing your money depend completely on the market situation, the quality of securities in the portfolio and the fund manager's performance.

When we buy a mutual fund at its NAV, we buy it at its book value. But what we really should be buying in a mutual fund scheme is its performance and not its NAV. This is why it is essential to keep a track of past records of a mutual fund’s performance and compare its returns over similar periods.


What is NAV In SIP (Systematic Investment Plans)?
NAV in SIP is the same as the NAV of a mutual fund. SIP and lump sum are two methods through which you can invest in a mutual fund scheme.

SIP involves investing a fixed amount of money every month in a mutual fund of your choice. The amount gets automatically deducted from your bank account every month. Thus, it is regarded as a disciplined approach to investing in mutual funds. This is usually preferred by salaried investors looking to force save every month.

On the other hand, lumpsum investment involves investing a large amount of money in a mutual fund scheme at one go. This is usually preferred by investors who have a surplus of cash ready to invest.

So, no matter which method of investing in the mutual fund do you opt for, the characteristics remain the same. NAV in SIP and NAV of mutual funds via lumpsum investments remains the same.


It is advisable to look at the fund’s total return instead of only tracking the changes in its NAV to judge the overall performance of a mutual fund. Also, you may look at the historical performance and current cost among other parameters before investing in a fund. If you need any assistance to invest in the mutual fund market, you may contact IndiaNivesh Ltd. We can help you select the right mutual funds for your portfolio based on your investment horizon and financial goals.





Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.