When choosing between various mutual funds, there are many things that an investor must consider. One of these is NAV of a mutual fund. To understand how NAV is calculated and how it impacts your decision, knowing NAV formula may help you a great deal.
This guide will help you in understanding the NAV calculation (net asset formula) and more.
What is Net Asset Value (NAV) in Mutual Funds?
NAV is the value per unit of a mutual fund / ULIP. As an investor, when you buy or sell units of a mutual fund, you buy or sell it at the Mutual Fund and Exchange-traded fund (ETF) price.
Also Read: NAV in mutual funds
It is calculated daily because the value of assets, cash held, liabilities, and outstanding shares constantly fluctuate.
NAV Formula: NAV Calculation
For the purpose of NAV calculation, we use the below-mentioned NAV formula:
NAV Formula = (Total Asset Value— Expense Ratio) / Number of Outstanding units
NAV Calculation Example
Explaining NAV formula with an example here,
Example: Suppose you buy in a mutual fund scheme with market value of Rs 100 lakhs. It issues 10 lakh units of Rs 10 each. Expense ratio of this MF is 1%. The NAV of this mutual fund will be calculated as shown below:
NAV =(100 lakhs – 1% of 100 lakhs)/10 lakh units
= (100 lakhs – 1 lakh)/10 lakh units
= 99 lakhs/10 lakh
= Rs 9.90
Thus, the NAV of this mutual fund will be Rs 9.90 per share at the end of the day.
What are the Factors that Impact Mutual Fund NAV?
Now that we have understood how to do NAV calculation, it’s important to note that the NAV of a fund fluctuates on a regular basis. Here is the list of factors that impact mutual fund NAV:
Profit or Loss:
With the rise of profits of a particular mutual fund, the NAV also rises. Both NAV and the performance of a mutual fund have a proportional relationship. Likewise, if a particular stock is experiencing a downfall, it will affect the NAV calculation; in other words, the NAV of that particular fund or stock would be lower.
Expenses Involved in Mutual Funds:
A mutual fund is one of the go-to investment options for beginners not only because of the returns it generates and the investment safety it carries. But it is also because mutual funds are managed by mutual fund managers. These managers are experts in their field, and they offer their services in exchange for a fee.
This fee is termed “Management Fees”, which gets deducted from the NAV of the Mutual Fund while doing NAV calculation. Hence, the management expenses of the mutual funds actually reduce the NAV of a Mutual Fund
Entry or Exit of Investor:
The NAV calculation of a mutual fund is affected by the entry and exit of the investor. When an investor exits the scheme after booking their profits, the NAV reduces for the existing investors. Likewise, the updated NAV decreases every time a new investor enters the scheme at a low previous NAV.
How Does Mutual Fund NAV Impact Investors?
Net Asset Value of a mutual fund can only influence the number of units you may get. A fund with a high NAV will get you fewer units; your investment value will still remain the same. As an investor, what should matter to you is the performance of the fund and the returns it generates.
Also Read: What are Hybrid Mutual Funds?
NAV Formula: FAQs
NAV is affected by the underlying investments of profits earned or losses.
According to the rule of India’s securities and exchange board (SEBI), NAV is calculated on the realization of fund houses before the prescribed time.
Your investment decisions should not be based on the NAV. A higher NAV would not be considered an investment option with high future prospects; neither would be a scheme with a lower NAV. NAV simply decides the unit of the mutual funds you will be getting. Therefore, it’s essential that you base your investment decisions on the returns and performance of the portfolio.
The NAV of a mutual fund usually commences at INR 10 at the time of NFO.