The net asset value in mutual funds is the value of one unit of a scheme. This allows investors to track their holdings daily and see how a fund has changed over time. A mutual fund can have shares, bonds, cash and money market investments. It may also have costs and unpaid dues. NAV translates these items to a figure per item.
What is Net Asset Value?
NAV is the value of the scheme’s assets after deducting its dues. It is then divided by the number of units outstanding. AMFI defines NAV per unit as the value of the securities of the scheme on a particular date divided by the number of units as on that date.
The formula is as follows:
NAV per unit = (Total assets – Total liabilities) ÷ Units outstanding
Fund costs are reflected in the daily NAV. Thus the costs charged to the scheme are already included in the stated NAV.
How is NAV determined?
The process involves four steps.
- It first values all of the assets in its portfolio. Shares are priced at the market prices. There are special valuation rules for bonds and other assets.
- Second, the fund adds cash, interest payable, dividends payable and other assets.
- Third, it deducts all dues and accrued charges. These could be things like unpaid bills, fund charges and running costs.
- Fourth, the net amount divided by the units outstanding.
Picture a scheme with assets of ₹105 crore and dues of ₹5 crore. It has net assets of Rs 100 crore. If 10 crore units are in issue, the NAV is Rs.10 per unit.
Why does NAV change?
The value of the fund’s portfolio fluctuates, and so does the NAV. NAV may rise if its stocks or bonds increase in value. If they fall, then the NAV may fall. Interest, dividends, costs and unit flows may also have an impact.
NAV is typically calculated at the end of each business day. This is not the intraday price of an open-ended fund. The NAV in force is applied to purchase and redemption requests. The cut-off time and the receipt of the funds may determine the NAV of which day applies.
NAV and Allocated Units
NAV tells how many units will be issued for a given amount. Say an investor invests ₹20,000 in a scheme with a NAV of ₹20. The investor receives 1,000 units, before any charge. At NAV of Rs 40, the same amount will buy 500 units.
This does not imply the ₹20 scheme is cheap or has better prospects of return. In both cases, the investment is ₹ 20,000. The only difference is the amount of units.
Is a lower NAV better?
Low NAV does not mean the fund is undervalued. The scheme may have started later, at a different face value, or with a different payout history.
Select two mutual fund schemes. Scheme A has a NAV of ₹20. Scheme B has a NAV of 100. Both portfolios rise 10%. Their NAVs then turn to ₹22 and ₹110. In either scheme, an amount of ₹10,000 becomes ₹11,000 before tax or exit load.
The return is not based on the starting NAV. The result is driven by the percentage change in the fund’s assets.
The impact of NAV on returns
Fund returns reflect change in Net Asset Value. Any payout, if applicable, may also be included.
Growth plan: Return = ( ( Ending NAV – Starting NAV ) / Starting NAV ) * 100
NAV going from ₹25 to ₹27.50 gives a return of 10%. If it drops from 25 to 23.75, the return is -5%.
For SIP, each installment may get units at different NAVs. When NAV is low, one payment can purchase many units. Another may buy less when the NAV is high. The final result is based on all payments, units held, and the current NAV.
NAV also reflects the current value of a holding: Current value = Units held x Current NAV
A holder of 2,000 units at a NAV of ₹18 will have a holding value of ₹36,000. This amount may not be inclusive of tax or exit load payable on sale.
What else do investors need to consider?
NAV should be read along with the fund’s objective, assets, risk profile, expense ratio, exit load, benchmark and track record of returns, it said. NAV alone cannot tell you whether two schemes are on the same plan or carry the same risk.
The plan and option must also be the same. Direct and regular plans have different NAVs and costs. Growth and payout options treat income differently.
NAV can be high due to age of a fund and years of gains. Low NAV could be a new fund. Neither figure alone represents future results.
Conclusion
The net asset value of mutual funds is the value of one unit after deducting all costs and dues. It decides the unit allotment and tracks an investment. A high or low NAV by itself does not show return potential. Fund assets, costs, risk, time and the scheme’s goal provides the wider view required to assess mutual fund schemes.