July 8, 2020
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NAV 101: NAV meaning, types and formula

NAV (Net Asset Value) is defined as the per-unit market value of the assets of a mutual fund. It is used to depict the performance of a mutual fund over the years. The general rule that applies to the unit cost of mutual funds is that it starts with ₹10 and increases with the growth of assets under the funds. According to this rule, the popularity of a fund affects its NAV. Therefore, the most popular mutual fund would have the highest NAV

As it is known, the amount that the investors spend on mutual funds is invested in securities. That is why a mutual fund always holds certain assets under the scheme and the investors possess a certain amount of units of the mutual fund. 

What Is The Relevance Of NAV?

At first, most of the investors are of the opinion that the NAV of a mutual fund is similar to the price of its equity share. But there is quite a fair difference between the two. NAV is calculated by taking the valuation of both liquid and non-liquid assets into account whereas the price of equity share is calculated by only including the liquid assets.

Thereafter, an investor must not make the mistake of considering the NAV of a mutual fund for evaluating its performance. A lower NAV does not mean that the investor would be in a gaining position just because he is buying shares at a lower price. 

Therefore, the NAV of mutual funds only reflects the current value of the units. The higher the NAV meaning that an investor would be receiving a lower number of units and vice-versa. 

What Is The NAV Formula?

The formula for NAV calculation is given as:

NAV = [Assets- (Liabilities+Expenses)] / Number of units outstanding

Assets stand for the total value of securities and liquid cash. Here, the securities include debentures, commercial papers, bonds, equity, bills of exchange, etc., in which the mutual fund scheme has invested. 

Liabilities and expenses stand for interest payable, money payable, and other expenses related to the fund management. 

It has to be noted that to get the accurate value of NAV, it is extremely important to include all the justified and qualifying items under assets and liabilities. 

How Is NAV Calculated?

There are two types of calculations that are used to determine the value of the NAV of a mutual fund. They are :

  1. Daily net valuation of assets: The mutual funds investment companies do a daily calculation of NAV based on the total worth of their portfolio after the stock market gets closed at 3.30 p.m. The next day the market reopens with the previous day’s closing prices. So accordingly, the fund houses make deductions of the due expenses and then determine the current NAV of the day.
  2. The general calculation: The general NAV is denoted by the cumulative cost of individual shares and is represented as the price of its equity share. This calculation only provides the market value of a particular asset and is completely subject to change as per the inevitable market fluctuations. 

The NAV of mutual funds only represents the book value of a scheme. An investor is strictly advised to look at all other important factors like the past performance of the scheme, its current market valuation, etc. The returns churned by the scheme in the past few years must also be looked at before making the decision of investment. Therefore, the NAV should be used only to evaluate and understand how the fund performs every day in the market. It does not reflect how lucrative and profitable a fund is. Therefore, investors should take enough time and evaluate a mutual fund scheme as a whole rather than assuming its benefits based only on the NAV.