By News18
Net Asset Value (NAV) represents the price per unit of a mutual fund at the close of each trading day. It is one of the key metrics used to evaluate a mutual fund’s performance. NAV reflects the value of a single unit of the fund, based on the total assets it holds, after deducting liabilities and expenses.
A rising NAV over time typically signals strong fund performance, especially when it consistently outperforms benchmark returns.
Mutual funds work by pooling investors’ money to create a diversified portfolio that may include stocks, bonds, and other securities. The NAV determines the price at which investors buy or sell fund units—unlike stocks, which are traded throughout the day, mutual fund units are transacted only once a day at the NAV calculated after market close.
How is the NAV Calculated for Mutual Funds?
Three important quantities are determined to calculate the Net Asset Value of a Mutual Fund. Total Assets, which include the current market value of the fund’s investments, such as stocks, bonds and cash in hand, combined with any accrued income like dividends and interest. Liabilities, comprising all the fund’s financial obligations that involve fund management fees, expenses and other payables. Lastly, the Outstanding Units denote the total number of units held by the investor.
NAV Formula: Total Assets – Total Liabilities/Number Of Outstanding Units
An Example Of How NAV Is Calculated
– Let us understand the NAV calculation with an example with the following details of a mutual fund at the end of the trading day.
– Let’s say a mutual fund has investments worth Rs 80 crores in securities and 20 crores in cash, bringing the total investment or total assets to Rs 100 crores.
– At the same time, the fund has a liability quotient worth 20 crores due to the management fees and other expenses incurred.
– Given we have 10 crores of Outstanding Units, the calculated NAV for the Mutual Fund will be:
(100 crores – 20 crores)/10 crores = 80 crores/10 crores = Rs 8.
So, the NAV for the mutual fund will be Rs 8 per unit.
Investors don’t just look at the NAV of a mutual fund before going ahead with their investment. Various factors such as historical performance, expense ratio and consistency of the fund are also considered. The NAV is also influenced by the capital gains, dividends, sales cost and fund inflow and outflow. A higher NAV doesn’t indicate how expensive the fund is but reflects how the investments have grown over time.