What is NAV in mutual funds and how is it calculated?

Mutual funds allow investors to invest in stocks, bonds, gold, real estate, and many other securities. Goals like buying a new car, saving for a house, or destination wedding become achievable with the right mutual funds, each offering different features, benefits, and returns. But as an investor, you also have to think about which funds have the capability to earn high returns. How much should you invest and keep the tenure? There is a useful metric that can help with these decisions, Net Asset Value (NAV).

So, what is NAV in mutual funds?

NAV represents the mutual fund’s market value per share. When mutual funds are bought or sold, NAV is the price that investors pay or receive.

Calculated daily, NAV indicates the fund’s profitability and overall performance. It serves as an important benchmark for investment strategies. Since the NAV of a fund fluctuates with changes in its holdings and liabilities, the share price also changes. So, it is important to monitor it regularly and adjust your investments (if needed).

How to calculate NAV?

Add up the value of all the securities and investments held by the fund, subtract its liabilities, and then divide the result by the total number of outstanding units. The formula to calculate the NAV of mutual funds is:

Net Asset Value = (Total Asset Value- Expense Ratio)/Number of Outstanding units

Here, the total net assets include the value of securities held in the form of liquid cash, equity, bonds, debentures, or commercial papers. The liabilities include expenses like interest payable, fund management expenses, etc. 

Importance of NAV in mutual funds

• Accurate picture of your investments

NAV helps you track your investments’ growth and performance daily. This transparency helps investors to make calculative decisions about buying, selling, or holding the shares.

• Helps you enter or exit at a fair value

If you want to buy or sell fund shares, NAV is used to calculate the price at which the transaction will occur. This brings more transparency and consistency in prices. 

For example, if a fund’s NAV is Rs. 10 and you want to buy 100 shares, the total cost would be Rs. 1,000. In the same way, if you withdraw 50 shares, the proceeds would be Rs. 500, as per the current NAV. (Brokerage and other transactional costs are excluded). 

By using NAV as a reference point, you can confidently enter or exit investments at a fair value.

• Risk assessment

Mutual funds disclose their NAV daily. So, you can get real-time updates about investments, track the fund’s progress, and understand the factors influencing the funds’ value.  

• Assess the fund’s stability and its ability to generate returns

NAV can be used as a useful tool to evaluate the risk associated with a fund as fluctuations in NAV reflect market movements and indicate its volatility or stability level. 

For instance, an increasing NAV indicates that the fund is performing well, generating profits, and meeting investors’ expectations. If the fund’s NAV is declining in value, it may indicate poor performance, financial challenges, or more risk. 

Final word

While NAV is an important metric to track, as a responsible investor, you must also consider other factors such as the fund’s objectives, fees, and risk-return profile. 

You can consult a financial advisor to understand if a lump sum or systematic investment plan (SIP) is more beneficial for you. Just make sure to use a mutual fund SIP calculator to compare different SIP plans depending on their performance and other features. This can help you create a more strategic plan and long-term profitable portfolio.