Net Asset Value of Mutual Fund
Definition : Net asset value (NAV) is the per unit market value of a fund held by the investors. It is the price at which investors purchase fund units from a fund company or sell it back to the fund house. Mutual funds are bought and sold in units.
How is NAV calculated : It is calculated by dividing the total value of all the assets in a portfolio, minus all its liabilities. The NAV of a fund is calculated either by the mutual fund house itself or by an accounting firm hired by the mutual fund.
Generic NAV Calculation : Suppose a mutual fund has a Net Asset Value of ₹500, then that is total amount that investors must pay for one unit of mutual fund. On the other hand, if an investor invests ₹5,000 in a mutual fund with a net asset value of ₹500, then he can buy 10 units of that fund.
Daily NAV Calculation : Mutual fund houses estimate their portfolio’s value after the closing of stock markets at 3:30 p.m. each day. Next day, market opens with the previous day’s closing share prices. The fund house subtracts all the outstanding liabilities and expenses from the total value of assets and then divide the net value by total outstanding units to calculate net asset value (NAV). The formula is mentioned below:
Net Asset Value = [Assets – (Liabilities + Expenses)] / Number of outstanding units
where,
Assets include money invested in securities (equity, debentures, bonds and commercial papers) + Cash in hand + Dividends on shares + accrued interests
Liabilities and expenses include the money payable, interest payable, fund management expenses etc.
Now let us take numeric example to understand the calculation. Suppose there is ABC mutual fund Company with following classification of asset, liabilities and expenses at some day.
| Assets | Amount (Rs) | Liabilities | Amount (Rs) | Accrued Expenses | Amount (Rs) |
|---|---|---|---|---|---|
| Securities | 8,00,000 | Short term liabilities | 1,25,000 | Accrued expenses | 85,000 |
| Cash and cash equivalents | 3,00,000 | Long term liabilities | 95,000 | ||
| Receivables | 1,00,000 | ||||
| Accrued interest | 40,000 | ||||
| Total | 12,40,000 | 2,20,000 | 85,000 |
| Particulars | Amount (Rs) |
|---|---|
| Total Assets | 12,40,000 |
| Total liabilities +Accrued expenses | 3,05,000 |
| Net Asset Value(12,40,000-3,05,000) | 9,35,000 |
| Total units outstanding | 1000 |
| NAV per unit | 935 |
Hence, NAV is just the total value of the mutual fund scheme investments less liabilities and expenses.
When is NAV calculated?
The price of the underlying assets (say stocks) keeps changing whole day so it is impossible to calculate NAV in market hours. Therefore, NAV is calculated at the end of the day after taking into accounts closing day prices of the assets that the scheme holds.
Role of NAV in fund performance
When different schemes are having same amount of investment then the Net Asset Values do not matter. Unlike the share prices which are determined by the forces of demand and supply in the market, NAV is not determined by the market forces. NAV alone does not give us a comprehensive analysis of fund performance. Investors should consider other characteristics like past performance, the type of the mutual fund.
Difference between NAV and market price
Many a times investors assume Net Asset Value (NAV) and the market price to be the same but these are two different concepts. Whenever a mutual fund has a lower NAV, many investors take this as a good opportunity to invest as fund are available at cheaper price, but this approach is wrong.
Let us explain why this approach is not correct.
When a company is listed on the stock exchange, its shares are available for the public to buy. The cost of the shares that an investor can pay and buy the shares is also listed on the stock exchange. This is exactly the market price of the shares. This market price gets affected by many variables that change the market price. These variables are nothing but the demand and supply ratios, performance of the company in the past and its prospects in the future.
Conversely there is no such concept in mutual funds as the units of mutual funds are bought at a NAV which is book value. NAV is simply the total value of mutual funds calculated by subtracting liabilities from assets at the end of the trading day. NAV does not get changed with the change in demand of mutual funds as it only shows the current price of units.
Relevance of a low and high NAV in different schemes
Suppose we invest Rs 1 lakh in scheme P and Rs 1 lakh in scheme Q simultaneously. Now, we will first look at the NAV of scheme P.
Scheme P with NAV of Rs 10
Returns = Rs 10% monthly
Units Purchased= 1,00,000/10
= 10,000 units
Therefore, NAV of 1 unit = Rs 11
Value of investment = Rs 1,10,000 (11 multiply by 10,000)
Similarly consider Scheme Q with NAV of Rs 50
Initial investment = Rs 1,00,000
Returns = 10% monthly
Units purchased = 1,00,000/50
= 2,000 units
Therefore, NAV of 1 unit = Rs 55
Total value of investment = Rs 1,10,000 (2000 multiply by Rs 55)
So, what we observed from the above example?
Although Scheme Q is expensive as an investor could buy only 2,000 units whereas he bought 10,000 units of scheme P with same amount. However, the investment generated by both the schemes is same. Therefore, we can conclude that NAV of schemes with same portfolio is irrelevant, keeping other things constant.
Should one consider investing in mutual fund with a higher NAV?
NAV alone is not the best parameter to decide which mutual fund units to buy. For example, a growth of 20% with NAV of 20 is the same as the 20% growth with NAV of 200. It is the performance of mutual funds that matters while investing not just the NAV. In the above-mentioned example, we have seen that Net Asset Value is of no relevance. However along with higher NAV if other factors like historical performance, positive outlook etc. are good, then you should invest in it. Investors do not have to worry much about Net Asset value being overvalued or undervalued as NAV is not decided by the demand of mutual fund units.
What do the daily changes in NAV indicate?
Daily change in NAV of a mutual fund schemes shows an increase or decrease in the assets value of the Fund. However, financial analysts tell investors to look at the annualized return of a fund over different time periods to comprehensively analyses its performance because daily changes in NAV do not hold much importance.
How is NAV updated?
As per SEBI guidelines Mutual funds are required to update Net Asset Value of mutual funds latest by 9.00 pm every day. However, Mutual funds can update their NAV as per their time but before 9.00 pm. The NAV cannot be updated live because of constantly changing prices of different assets held by a mutual funds.
Conclusion – The net value of an asset just tells us how the underlying assets have done in the past. Thus, the net value of an asset is important when it comes to understanding how a fund performs daily. It does not indicate the profitability of a fund. Investors are advised to check the current cost of funds and its historical performance before investing. Therefore, Net Asset Value, alone, is not a complete parameter to judge the performance of a fund.
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