Mutual funds have become the best source of wealth creation from market-related investments.  Mutual funds mitigate the market-related risks and give the investor an opportunity to make the most from the investment. An investor can track the progress of his/her mutual fund online on a regular basis to know the performance of the mutual fund. One of the key components when it comes to tracking the mutual fund performance is NAV (Net Asset Value) of the fund. The NAV is updated daily and is accessible to the investor to see. In this article, we will learn about the NAV and how NAV of a mutual fund is calculated.

What is NAV?

When an investor invests in mutual funds, units are allotted for the specified amount. NAV is the value per unit of the particular mutual fund on a specified day. It can be considered as a book value of the mutual fund.  The NAV gets computed every day of the active stock market. The NAV depends on the stock prices of the companies on a day to day basis, in which the mutual funds hold its investment.  If you plan to sell your mutual fund scheme, it is not necessary that you will be able to sell at the present day’s NAV. Suppose if you sell your mutual fund scheme too early, then you may be charged an exit load on a percentage of NAV. This way your actual selling price and NAV may show different figures.

For example:

If you invest INR 20,000 in a scheme that has a NAV of INR 100, you will be allotted 200 units of that mutual fund scheme. Let’s assume the NAV of the mutual fund increases to INR 110 in the period of six months and you want to redeem them. You will receive INR 22,000, but if the exit load of 1% is applicable on your withdrawal, you will get INR 21780 (200 units X INR 109.9 NAV minus the exit load)

How is mutual fund NAV calculated?

The calculation of the mutual fund NAV is done at the end of the day after the market closes and is based on the market value of the fund. The formula to calculate Ulip NAV is:

NAV = (Assets-Liabilities) / No of outstanding shares

You can use this formula to calculate the NAV of any mutual fund once the market trading is done for the day.

Liabilities generally include long-term and short-term liabilities, in addition to all the expenses, such as administration fees, fund manager salary, and other miscellaneous expenses.

There is a change in the NAV when a number of shares’, assets and liabilities change. If the number of assets increases, the NAV of the mutual fund will increase and if the liabilities increases then the NAV decreases.

For example:

Mutual Fund scheme that you are invested in has INR 100 crore of investments, after the day’s closing price of each asset.

It additionally has INR 7 crore of cash as well as INR 4 crore in total receivables.

The income for the day after trading is INR 7, 50,000.

The scheme has INR 13 crore in short-term liabilities and INR 2 crore in long-term liabilities.

Accrued expenses for the day are INR 1 lakh. The mutual fund has a worth of 5 crore of shares. The NAV will be calculated as per the below formula:

NAV = ((100,00,00,000 + 7,00,00,000 + 4,00,00,000 + 7,50,000) — (13,00,00,000 + 2,00,00,000 + 1,00,000)) / 5,00,00,000 = (111,07,50,000 — 15,01,00,000) / 5,00,00,000 = 19.21

How is NAV (Net Asset Value) different from the price of an equity share?

The market price of an equity share is normally different from its book value. There are many factors dependent on the price of the share that is listed on the stock exchange such as the company’s future and the sectoral performance in which the company is operating.

An investor does not have to worry about the market demand of the mutual fund as there is no such thing as market value for the mutual fund.  The mutual funds can be purchased as per the NAV on the given day.  Hence, the investor never has to worry about the right price of the asset. In a mutual fund scheme, there is no concept of high or low valuation of a mutual fund scheme. All depends on the performance of the stocks which exist in the portfolio of the fund. This makes the valuation of mutual funds more transparent and easy to understand.

Misconceptions about NAV

NAV is only the book value of the mutual fund in India scheme; it has nothing to with undervaluation or overvaluation of the mutual fund. There is a misconception amongst many investors that a fund value of INR 10 is better and cheaper than fund value of INR 100. Many a times, funds with a similar portfolio can have different NAVs. The wrong perception of the NAV is built by the investor for the mutual fund scheme he/she tries to compare the market price of an equity share.

Does NAV matter?

There is a false perception amongst investors that lower NAV will give them better returns. The return of a mutual fund scheme does not have anything to do with the NAV.

For example – an investor has INR 1,00,000 to invest in a mutual fund scheme. There are two options fund A and fund B.

Fund A has NAV of INR 100 and fund B has NAV of INR 500.

The investor will be allotted 1000 units if he/she invests in fund A and 200 units if he/she decides to go for fund B.

On completion of a year say the investment grows by 25%, let’s see the returns on fund A and fund B-

NAV of fund A will be INR 125 and fund B will be INR 625.

The returns calculation of your investment for fund A will be 1000 units X 125 = INR 1,25,000 and for fund B will be 200 units X 625 = INR 1,25,000.

Hence, the returns on both the mutual fund schemes are same irrespective of the different NAV.

Factors that actually affect the mutual fund returns

•    Quality of the mutual fund scheme

•    Quality of stocks in the mutual fund scheme

•    The efficiency of the fund manager and its team