Know more about the NAV of your Mutual Fund Scheme

Published On: 06-Jul-2020

NAV stands for Net Asset Value, which serves as the base and the transaction price for all the investment transactions, including purchase, redemption, switch transactions in a mutual fund scheme. For example, if NAV of mutual fund scheme is Rs. 10 and the investors have invested Rs. 5,000, 500 units will be allotted to the investor. NAV is the transaction value for all the mutual fund transactions processed during the business day and day & for liquid and overnight fund on daily basis represents the fair value of mutual fund units as on that day. 

Note: SEBI Guidelines require asset management companies to disclose NAV of all mutual fund schemes daily. (NAV is declared for a business day and for liquid and overnight fund on daily basis.)

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How is NAV calculated?

NAV is calculated based on market valuation of the securities held in the portfolio and adjusting such portfolio valuation for any working capital items, including receivables and payables. The NAV calculation is undertaken through the following formula:

NAV = (Portfolio Valuation + Receivables – Payables)/ No. of Units

NAV may be calculated up to 4 decimal points. SEBI Guidelines require asset management companies to disclose NAV of all mutual fund schemes daily. 

Importance of NAV for investors

NAV is only about specifying the transaction cost for a mutual fund transaction. However, a high or low NAV, on standalone terms, does not signify anything worthwhile for the investors. The investors must focus on the NAV changes over a few years to review the performance of the mutual fund scheme. 

How is the NAV of mutual fund scheme units different from the price of an equity share?

In the case of equity shares, the price is quoted on the stock exchanges. Such price is derived based on demand and supply of the shares and depends on the company's future performance expectations. Hence, the market price is not necessarily required to be equal to the book value. However, in the case of mutual funds, NAV is always equal to the book value calculated based on present valuations of the underlying portfolio. 

Is a fund with higher NAV expensive in valuations?

The NAV of the mutual fund scheme is not reflective of the valuations of the mutual fund scheme. For example, if there are two funds, fund A with NAV of Rs. 20 and fund B with NAV of Rs. 25, it is not necessary that fund A is cheaper. Usually, a fund NAV at the time of NFO (New Fund Offer) is Rs. 10, and it grows higher as the portfolio generates returns for the investors. Thus, a high NAV may also be based on that fund starting earlier in the markets.

Calculating Returns through NAV

When one has made mutual fund investments for the long term, it does not make sense to view the NAV daily. One must ignore the daily changes in NAV and review the portfolio periodically. One may calculate returns on mutual funds scheme through the NAV prevailing at the beginning of the investment period and NAV as at the end of the investment period. 

If the investment period is less than a year, the absolute returns are annualized for comparison. On the other hand, if the investment period is more than one year, returns through the CAGR (Compounded Annual Growth Rate) method are calculated. CAGR method considers the time value of money and factors in the returns reinvested in the investment portfolio. 

With the above fundamental principles about NAV, one would be able to make an informed decision regarding the choice of mutual fund scheme in a better manner, instead of getting misguided by a higher or lower NAV