Whenever an investor wants to invest, many questions arise in their mind. Where, when, and in which mutual fund to support? So, to make an informed investment decision, NAV can be of huge help to you. It is one of the determining factors in a Mutual Fund.
We will be learning more about NAV, and NAV formulas in this guide.
What is Net Asset Value (NAV) in Mutual Funds?
NAV is the value per unit of a mutual fund / ULIP. As investors, whenever you buy or sell any mutual fund, you buy or sell it at the Mutual Fund and Exchange-traded fund (ETF) price. NAV is used for measuring the one share value of a mutual fund.
It is calculated daily because the value of assets, cash held, liabilities, and outstanding shares constantly fluctuate.
For example, if the total number of securities is INR 10 and the total market value is INR 1 crore. If there are INR 10 lakhs unitholders, the NAV will be ten because INR 1 crore divided by INR 10 lakhs will be 10.
So NAV reflects the current value of underline securities divided by the number of unitholders.
What is the Net Asset Value (NAV) Calculation Formula?
For the calculation of NAV, we used the NAV formula, which is given below:
NAV Formula = ( Asset – Liabilities )/ Total no.of units (shares)
Liability and asset of a fund included correct qualifying item.
NAV Calculation Example
Explaining NAV formula with an example here,
Example – Suppose you invest in a mutual fund scheme, which investment is INR 200 crores, cash equivalent is INR 7 crore, and receive a total of INR 4 crores. Accrued income for the day is INR 7.5 lakhs. The fund has INR 13 crore short-term liabilities and INR 2 crore long-term liabilities. Accrued expenses for the day are INR 1 lakh. The outstanding units of the fund have exactly INR 5 crores. Using the above formula, the NAV is calculated as:
NAV = ((INR 200,00,00,000 + INR 7,00,00,000 + INR 4,00,00,000 + INR 7,50,000) – (INR 13,00,00,000 + INR 2,00,00,000 + INR 1,00,000)) / 5,00,00,000
= (INR 2,11,07,50,000 – INR 15,01,00,000) / 5,00,00,000
Thus, the share of the mutual fund will be traded at INR 39.21 per share.
The above-given Net Asset Value Formula will help you do the NAV calculation
How to check NAV of Mutual Funds?
Now that we know how to do NAV calculation let’s check how to check the NAV of Mutual funds
- Go to Google and search for the NAV price of any mutual fund scheme.
- Open www.utimf.com or another.
This is where you can know about the scheme of mutual funds and the current NAV price of that mutual fund.
Also Read: Types of Mutual Funds
What is the NAV cycle?
In the NAV cycle, fund investment is made in cash. To an investor, a share is issued by the fund manager, who then makes investments in different financial instruments. The NAV per share is based on subsequent investments, and withdraws are processed, so the cash paid to investors and the number of shares issued to investors is determined by the NAV cycle. NAV cycle needs to be monitored and checked regularly.
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 of Losses:
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.
The 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
The Type of Mutual Fund:
We are talking about direct and regular mutual funds here. A regular mutual fund comes with a higher NAV as against a Direct Mutual Fund. This is because Regular Mutual Funds involve extra fees that are payable to brokers and intermediaries. As for direct mutual funds, they are purchased by the investor online. Hence they are no charges that are to be paid, consequently resulting in a lower NAV calculation.
A mutual fund pays dividends to the investors every now and then. When this happens, the NAV reduces. Mutual Fund dividends operate on a redemption basis. The amount of reduction in the Net Asset Value is directly proportional to the dividend paid out. If you do not want the NAV to reduce with every dividend payment, you can opt for growth schemes instead of dividend schemes.
Entry or Exit of the 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 NAV decreases every time a new investor enters the scheme at a low NAV.
How Does Mutual Fund NAV Impact Investors?
Up until now, we do know that NAV calculation is important for investors as it indicates the worth of a fund. However, it must be noted that it is not a driving factor at any cost. Much to the misconception of many investors, a fund with a high NAV is not always the best option to channel your investment in. This is because NAV is not the market price of the stock. The market price is determined by investors in the stock market, depending on the future prospects of the company, performance and so on. As for NAV, it is affected by the entry and exit load, dividend payouts, administrative expenses, and a lot more factors.
Therefore, it is not a sagacious choice to base your investment decision on NAV. The comparison of the NAV of two mutual fund schemes does not reveal any information about their future prospects. Instead, it reflects the total value of the schemes, subtracted from liabilities and expenses.
A high NAV can only mean two things; first – that the scheme’s investments have performed well. Second, the scheme has been existing for a long period.
Having said that, the NAV 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?
Why Calculate NAV?
- To determine the payment of investors when investors withdraw from the fund.
- To determine the number of shares issued to new investors.
- To report fund performance.
Asset – Asset is a total investment and total profit which are receivable—stocks, bonds, securities, deposits, etc.
Liabilities – Liabilities are obligations or debt that an enterprise has to pay at some time that is payable. Ex. Money payable, Interest Payable, etc.
Equity – Invest in the share market or buy shares of any company.
Expenses – Fund management, office space, branding, etc.
Outstanding units – Total number of units allocated to investors.
According to SEBI guidelines, each mutual fund has to publish its NAV on each business day. The NAV is the asset of a fund less than the fund’s liabilities. The NAV is just a number, and when you are shortlisting Mutual Fund schemes. You need to compare their performances (returns) and not the NAVs. The value of your investment is more important than the number of units held by you.
The net asset formula must be calculated weekly, monthly, and annually to track the progress of your funds and for a comparison of funds as to which fund is generating profit for you and which fund is not so that you can plan your investment accordingly. Most brokers nowadays provide the facility of checking the NAV online easily by logging in to their portal.
Also Read: Tax Saving SIP
Ans. NAV is affected by the underlying investments of profits earned or losses.
Ans. 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.
Ans. NAV applies to all mutual funds from 1st February 2021.
Ans. Mutual funds use NAV to calculate the price per share of the fund.
None. 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.