Investment and mutual funds have become quite common with more investors choosing this option to invest via lump-sum or SIP route. There are certain factors that affect the investment returns of mutual funds such as commissions, exit load, expense ratio, etc. However, NAV or Net Asset Value tops the list for being a significant factor impacting the investment in mutual funds.
This article would help you understand what Net Asset Value is, its different types, how to calculate NAV and why it holds importance for investors and investment companies.
What is Net Asset Value?
Net Asset Value is a measure to determine the overall performance of a mutual fund or Exchange-traded Fund (ETF). It is the per-unit value of the fund for a specific date and a majority of the time begins with Rs. 10 per unit when the fund is listed. Based on the performance, this value increases or decreases reflecting the profit/loss of investors. Every mutual fund is required to calculate the NAV of the fund every business day, at least once.
In other words, NAV is the book value of mutual funds which gets impacted by changes in the market value over a long period. For a business or a company, It is calculated by subtracting the total liabilities of a company from total assets. While, for mutual funds, one more step is added–dividing the outcome by total outstanding units. NAV is more helpful in the case of open-ended mutual funds compared to closed-ended funds because of the freedom to liquidate the funds as required.
NAV helps in identifying profitable investment opportunities because it gives the access to compare the current market value of funds to its book value and analyse if the fund is over or undervalued. The value of NAV is dynamic and changes every day based on the per-unit price.
What is the formula for NAV and how to calculate it?
NAV can be calculated using the below formula.
NAV of a fund = Total Assets – (Total Liabilities + Total Expenses) / Total Number of Outstanding Units
Whereas,
Total Assets = Total value of assets for a particular fund scheme including cash holdings by the fund if any
Total Expenses = Other liabilities such as interest to be paid, debt to be paid in addition to the Expense Ratio
Let’s understand it with an example.
Suppose the total assets of a fund are Rs. 50,00,000, and total liabilities are Rs. 3,00,000, the expense ratio is 1.5%, and the number of units outstanding is 80,000.
We can calculate the NAV of this fund as follows.
NAV = Total Assets – (Total Liabilities + Total Expenses) / Total Number of Outstanding Units
= 50,00,000 – [3,00,000 + (50,00,000 X 1.5%/365)] / 80,000
= 58.74
The NAV of the fund comes at 58.74 per unit. If an investor has bought the fund units at Rs. 10 face value, the profit per unit would come at 48.74.
Mutual funds are required to calculate NAV on a daily basis for business days once the stock market closes at 3:30 pm. As a result, the value per unit that investors get may vary when the NAV is applied.
Why is Net Asset Value crucial for a business/fund performance?
For a business or mutual fund, NAV helps in assessing the overall performance and makes the comparison of past returns easier. From the viewpoint of a fund house, a change in NAV does not reflect the profitability on the balance sheet. It typically denotes how the fund has grown during a specific period.
For example, if the NAV of XYZ increases to Rs. 100 per unit in January from Rs. 50 per unit in December in the previous year, which means the fund has attracted more investors and has expanded. In technical words, the fund’s Asset Under Management (AUM) has increased.
Why is NAV important for investors?
Unlike for a mutual fund or business, for investors, NAV is the price per unit to invest in a fund. Thus, directly affecting their overall investment returns. For example, there are two funds with the first fund having a NAV of Rs. 20 and the second fund has a NAV of Rs. 150. An investor has Rs. 10,000 to invest and can select from any of these funds.
If the investor chooses the first fund, he/she would get 500 units (10,000/20). If the preferred choice is the second fund, the allotted units would be 66.66 (10,000/150). The performance of both funds varies depending on the fund manager’s solicitation of investment instruments and will impact the portfolio of investors.
However, there is no perfect conclusion that a lower NAV is profitable or a higher one. It depends on the fund size and the overall performance. As an investor, you can check how the fund has performed in the past and based on that and your goals, make decisions on which fund to invest in. NAV would only decide how many units you will get.
Investors should be aware of the fact that different mutual funds have different cut-off times for NAV allotment.
- For Overnight/Liquid MFs: If you submit your request before 1.30 pm, you will receive the NAV of the previous day. If you submit it after 1:30 pm, you will be allotted a same-day NAV.
- For debt/equity MFs other than Overnight/Liquid Funds: If you submit the request before 3 pm, you will receive the NAV of the same day. However, if it is after 3 pm, you will get NAV for the next day.
Note: Read business day for the previous day or the next day NAV.
Conclusion
NAV helps a business or a fund to get an estimate of its performance in terms of growth and compare it with similar competitors. While for investors, it is more about the units they can expect to be allotted. Investors can calculate NAV as Net Asset Value divided by the number of outstanding units. Before investing in mutual funds, it is important for investors to check different aspects of funds in addition to NAV to gauge a better understanding of its overall performance.
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