NAV stands for Net Asset Value. Novice investors frequently ponder over the question: "What is NAV in mutual funds context?" So, here we are to answer this question for you!
Understand it this way - every product physical or virtual has a price tag, and even your mutual fund investments come with a price tag. Read on to know more about what NAV is.
What is Net Asset Value (NAV)?
NAV or Net Asset Value is the unit price of a mutual fund scheme. It is the price at which you purchase or sell your mutual funds. Mutual fund NAV denotes the market value of the underlying securities of the mutual fund scheme. It is also an important indicator of the performance of your investment in mutual funds.
A mutual fund is a pool of money, where investors invest in the funds and the fund house in turn invests the amount in various investment vehicles like stocks, bonds, etc. as per the scheme’s mandate. As an investor, you are given units of mutual funds in return for your investment. The NAV is a representative of all the assets held by a mutual fund.
Since the value of underlying securities that mutual funds invest in changes from time to time, the market value of the securities held by the mutual fund scheme is assessed and divided by the total number of units offered under the scheme.
While you may think, NAV is similar to the price of a share but that is not the case. NAV is a metric used for valuing mutual funds, calculated by dividing the total value of assets by outstanding units, with changes reflecting underlying asset fluctuations; investors buy/sell funds at NAV. In contrast, stock price pertains to individual company shares, determined by market dynamics, and varies continuously during trading hours, driven by company performance, news, and market sentiment; stocks are bought/sold at prevailing market prices.
SEBI Mutual Fund Regulations, the calculation of NAV takes place at the end of each day, basis the closing prices of all the securities held by the respective mutual fund schemes, after necessary adjustments have been made. The adjustments are made for the expenses of the mutual fund scheme such as fund management charges, administration charges, distribution charges, etc. These expenses are charged proportionately against the assets of the scheme and are adjusted in the NAV of the scheme.
The NAVs of mutual fund schemes are daily published on respective mutual funds’ websites.
How is NAV Calculated?
After understanding NAV meaning in mutual funds, you may want to understand how NAV is calculated.
Let us understand this with the help of an example.
A mutual fund company introduces a new scheme for investment through a New Fund Offering (NFO). Let us say, in the NFO, the units of a scheme are priced at Rs. 20 each. Say, the mutual fund company gathers Rs. 2,000 crores from various investors during the NFO.
Because the price for the NFO units is set at Rs. 20, the mutual fund company gives out units to investors based on the total amount collected. In this instance, the mutual fund company distributes 100 crore units (Rs. 2,000 crores / Rs. 20 NAV) and allocates them proportionally among investors according to their invested amounts. This means, if you had invested Rs. 1 lakh into this NFO, you would receive 5,000 units.
Now let us say, the collected amount of Rs. 2,000 crores is invested by the mutual fund company in various securities. We know that the market prices of these securities change from day to day. So, let us say, the very next day the portfolio value of the scheme increases from Rs. 2000 crores to Rs. 2020 crores. Now the scheme NAV will be calculated as Rs. 20.2 (i.e., Rs. 2,020 crores / 100 crore units). This means, your initial investment of Rs. 1 lakh into the NFO, is now worth Rs. 101,000 (5,000 units x Rs. 20.20 NAV).
The above calculations are done for illustration purpose only. For ease of calculation, we did not consider the scheme expenses in the above example.
How is the Applicable NAV Calculated?
For determining the applicable Net Asset Value for subscription and redemption transactions, the funds are classified into two categories:
• Liquid Funds and Overnight Funds
• All Other Schemes (other than Liquid Funds and Overnight Funds)
As per the new SEBI Rule applicable from 1st February 2021, the applicable NAV in respect of the purchase of units of a mutual fund scheme (including Switch-In transactions) shall be as follows:
|
Liquid Funds and Overnight Funds |
All Other Schemes
(other than Liquid Funds and Overnight Funds) |
Subscription |
- Where the application for transaction is received up to 1.30 p.m. on a day and the funds are received by mutual fund before 1.30 p.m. without availing any credit facility, the closing NAV of the day immediately preceding the day on which the application is received shall be considered as the applicable NAV.
- Where the application for transaction is received after 1.30 p.m. on a day and funds are received by mutual fund on the same day without availing any credit facility, the closing NAV of the day immediately preceding the next business day shall be considered as the applicable NAV.; and
- Irrespective of the time of receipt of the application for transaction (before or after 1.30 p.m. on a day), where the funds are not received by mutual fund before 1.30 p.m. without availing any credit facility, the closing NAV of the day immediately preceding the day on which the funds are available for utilization shall be considered as the applicable NAV.
|
- Where the application for transaction is received up to 3:00 p.m. and funds are received by mutual fund before 3:00 p.m., the closing NAV of the day on which the application is received shall be considered as the applicable NAV.
- Where the application for transaction is received after 3:00 p.m. and the funds are received by mutual fund, the closing NAV of the next business day shall be considered as the applicable NAV.
- Irrespective of the time of receipt of the application for transaction (before or after 3:00 p.m.), where the funds are not received by mutual fund, the closing NAV of the day on which the funds are available for utilization before cut-off time of 3.00 p.m. shall be considered as the applicable NAV.
|
Redemption |
- Where the application for transaction is received up to 3.00 pm
– the closing NAV of the day immediately preceding the next business day shall be considered as the applicable NAV; and
- Where the application for transaction is received after 3.00 pm
– the closing NAV of the next business day shall be considered as the applicable NAV.
|
- Where the application for transaction is received up to 3.00 pm – the closing NAV of the day on which the application is received shall be considered as the applicable NAV; and
- Where the application for transaction is received after 3.00 pm – the closing NAV of the next business day shall be considered as the applicable NAV.
|
Are NFOs cheaper?
New Fund offers are offered at a NAV of Rs. 10, there is a popular myth that NFOs are cheaper. The NAV of any fund will be derived from the underlying securities and the accumulated profits. For a new fund, there are no accumulated profits and hence, the NAV is at par. For an existing mutual fund with the same underlying portfolio, the NAV would be higher due to the accumulated profits over time. It could also be lower if there are accumulated losses since inception.
Conclusion
It is important to be aware of the concept of NAV, it provides an understanding of the cost price and the sale price of mutual funds. It determines the number of units that will be allocated to you. However, from a fund selection perspective, NAV is insignificant. You should be looking at the performance of the fund over the long haul and comparing it with peers and benchmark indices. NAV is a proxy for determining these returns, as the difference in NAV over the period under consideration will provide the past returns of the fund.
Gaining knowledge about NAVs will only help you deepen your understanding of your mutual fund investments. It will also help enable you to make informed decisions in the future.
Must Read - How to Invest in Mutual Funds?
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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