NAV: What is Net Asset Value in Mutual Funds

While investing in mutual funds through a systematic investment plan (SIP), it is important to understand all the terms associated with it. Net Asset Value (NAV) is one of them. NAV assists investors in knowing the market value of a single unit of a mutual fund. It is derived by dividing the fund's total assets minus liabilities by the number of units. NAV varies daily according to market performance. While investing via a SIP, the NAV decides the units an investor can get. A lower NAV gives more units, and a higher NAV provides fewer units. This article explains what is NAV and what is net asset value in mutual funds.

What is NAV? –

Net asset value refers to the value per unit of a mutual fund. NAV is determined by deducting the liabilities of the fund from its assets and dividing the same by the units. NAV is usually set at a base value during a new fund offer (NFO), but this can vary depending on the scheme. It varies daily for open-end schemes, as it represents market value.

Net Asset Value Formula – 

The net asset value formula is as follows:

NAV = (Assets - Liabilities) / Total units

Important Points Regarding NAV Calculation:

• Assets: All investments and cash balance.

• Liabilities: All expenses, payables, and cost of fund management.

• Expense Ratio: Charge for managing the fund.

• Time of Calculation: After market hours.

• Declaration: Mutual fund houses announce NAV on a daily basis.

How does NAV work? – 

NAV is the value of assets of a mutual fund minus liabilities. NAV varies daily with changes in asset values. Expenses are deducted by the asset management company (AMC) before announcing NAV. When the assets under management (AUM) of a fund increase, NAV can rise.

For instance, if a scheme has assets worth₹100 crore and their value appreciates to ₹120 crore, the NAV goes up. This is an indication of greater investment value. NAV alone does not determine fund performance. A comparison of NAV patterns over time provides information to investors about growth. Understanding how NAV works can help make informed investment decisions.

Calculation of Net Asset Value – 

Investors can do the calculation of net asset value using the following two methods.

Daily NAV Calculation - 

1. Mutual funds assess the worth of their portfolio every day, normally after trading hours (3:30 pm).

2. NAV is determined using closing prices of the same day.

3. Subsequent deductions are made in the form of any expenses or liabilities before the NAV is declared.

General NAV Calculation - 

1. In this method, the number of units is calculated based on the current NAV.

2. For instance, if you invest ₹10,000 and the NAV is₹100, you get 100 units.

3. If the NAV increases to ₹120 for the subsequent SIP, you will get fewer units (83.33 units in this example).

4. Every SIP amount is translated into units according to the prevailing NAV at the time of investment.

What is the Net Value of Assets for Mutual Funds? – 

The net asset value of a mutual fund is the difference between the total liabilities and assets of a fund divided by total number of units, providing an accurate measure of its overall value in the market.

Assets - 

• Consists of the market value of investment, receivables, cash, and other income.

• Computed at the end of the day using closing prices of securities held in the portfolio.

• This may include liquid funds, cash, interest payments, and dividends.

• Total assets are the total worth of the fund.

Liabilities - 

• Consists of outstanding payments and amounts owed to lenders.

• Comprises fees and charges 

Net Asset Value (NAV) - 

• The NAV for mutual funds is computed by subtracting the liabilities from total assets dividing it by total number of units.

• NAV is calculated on all business days, incorporating changes in liabilities and assets.

How is NAV Relevant to Investors? – 

The net value of assets (NAV) is relevant for investors in the following ways.

1. Present Value of Investment: -

NAV indicates the present value of the mutual fund units, providing transparency in monitoring investments.

1. Purchasing and Selling: - 

Investors purchase and sell mutual fund units against the NAV, helping in making decisions on entering or exiting the fund.

1. Performance Monitoring: - 

Historical NAV values can be used to determine the fund's past performance. Growth is shown by an increasing NAV, while a decreasing NAV might indicate tough market conditions.

The Significance of NAV in SIP – 

Net asset values (NAV) play a significant role in determining investments made via systematic investment plans (SIPs). This is how NAV impacts SIPs.

1. Unit Allocation: - 

The allocation of mutual fund units depends on the prevailing NAV.  A lower NAV allocates more units, and a higher NAV allocates fewer units.

1. Cost Averaging: - 

SIPs avail rupee-cost averaging. Higher units are purchased when NAV is low and vice versa, reducing the cost on an average basis over a period of time.

1. Long-Term Perspective: - 

Fluctuations in NAV are usual, but long-term growth is more important. Consistent NAV over time suggest stability and possible positive outcomes.

1. Strategic Timing: -

Knowing the trends in NAV allows investors to make informed decisions on when to invest, especially when NAV is low, which leads to acquiring more units.

What are the Investment Choices at Axis MF? – 

At Axis MF, investors have a variety of investment options to choose from according to their financial objectives:

1. Lumpsum Investment: -

A lumpsum investment may be suitable for investors who want to invest a larger amount at one time.

1. Systematic Investment Plan (SIP): - 

SIP facilitates periodic, low-value investments, potentially helping investors build their portfolios consistently over time.

1. Axis Flex SIP: - 

This flexible mode allows investors to vary their SIP amounts, reflecting fluctuations in income or financial goals.

1. Systematic Withdrawal Plan (SWP): -

SWP may be suitable for investors who want to withdraw funds periodically while maintaining their investments.

Conclusion – 

Understanding the concept of NAV and net asset value calculations is important for anyone starting mutual fund investment, especially through SIPs. NAV helps investors track the value of their investments and make informed decisions. It plays a major role in determining how many units you receive in a mutual fund and impacts the overall performance of your investments. With various investment options, such as SIPs and lumpsum investments, investors can make choices based on their financial goals and knowledge of NAV.

NAV FAQs – 

What does NAV mean? - 

NAV stands for net asset value, which is the per-unit value of a mutual fund. The fund's total assets minus liabilities divided by the number of outstanding units gives the NAV of a fund.

What is Historic NAV? - 

Historic NAV refers to past NAV values, helping investors track a fund's performance over time.

Who calculates NAV? - 

The asset management company (AMC) calculates NAV. The calculation is done on a daily basis. 

How is the applicable NAV determined? - 

The applicable NAV is determined based on the market value of a fund's assets and liabilities at the end of the trading day divided by total number of units.

Is a higher NAV more suitable than a lower NAV? - 

A higher NAV does not necessarily indicate a more suitable fund. It depends on the overall fund performance and market conditions.

Does NAV matter in mutual funds? - 

Yes, NAV matters in mutual funds; it helps investors assess fund performance and determine entry and exit points.

What is the suitable NAV for mutual funds? - 

The suitable Net Asset Value (NAV) for mutual funds varies based on an investor's financial goals and risk appetite. Hence, analysis of fund performance and one’s investment horizon is essential to determine a suitable NAV. 

What causes the NAV of a mutual fund to increase? - 

NAV increases when the value of the fund's assets, such as stocks or bonds, appreciates.

Why is Mutual Fund NAV important for investors? - 

NAV allows investors to evaluate their fund's performance and decide when to invest or redeem units.

Can NAV go below its face value in mutual funds? - 

Yes, NAV can fall below its face value. This can occur especially during market downturns.

How frequently is NAV calculated? - 

NAV is calculated on all business days. Generally, the calculation is done after the market hours.

Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Axis MF/AMC is not guaranteeing/assuring any returns on investments. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. 

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.