Net Asset Value (NAV) is the market value of each unit of a mutual fund. As mutual fund investors, it is important to understand NAV and how it is relevant to your investing decisions. Read on to find out how NAV is calculated and how mutual fund units are allotted based on it.
What is NAV?
NAV measures the per unit value of mutual funds. In other words, it reflects the market value of the mutual fund unit. It is an indicator of the fund's performance. If NAV increases, the value of underlying assets will increase. In contrast, if the NAV falls, it means the value of underlying assets fell.
The NAV of the fund is declared daily, and the mutual fund units are allotted or redeemed based on the time of purchase or redemption. If you place a purchase or redemption request before 3 pm on a business day, then the same day’s NAV is applicable. However, if you place the purchase or redemption request after 3 pm on a business day, then the subsequent day's NAV is applicable. These cut-off timings are valid for all mutual fund schemes except for liquid and overnight funds. For liquid and overnight funds, the cut-off time is 1:30 pm.
How does NAV work?
NAV represents the value of each mutual fund unit. Since it tracks the value of the underlying assets, NAV's value changes daily. Unlike stocks, the value of NAV doesn't change every minute. Instead, it is declared at the end of each day based on the value of underlying assets. It is important to note that NAV can go in either direction. If NAV increases from the day before, the value of your investment will grow. However, if the NAV falls, the value of your investment has fallen.
How is the net value of an asset calculated?
The NAV is calculated by dividing the total net assets by the total outstanding units. The following is the formula for calculating the NAV.
NAV = (Total assets – Total Liabilities)/ Total number of units
Where assets represent the cumulative underlying value of all investments, cash, and accounts receivable.
Liabilities include outstanding payments to lenders and other fees that have to be paid to entities.
The total number of units is the outstanding number of shares in a mutual fund.
Let's understand NAV calculation better by using an example. Suppose the total assets in a mutual fund are Rs 100 crores, the liabilities are Rs 2 crores, and the total number of units are 10 crores. Then the NAV of the fund is calculated as follows.
NAV = (100-2)/10
NAV = Rs 9.8.
This means the value of each unit is Rs 9.8.
Role of NAV in the performance of a fund
NAV is the primary measure to track the performance of a fund. The increase or decrease in the value of NAV helps calculate the returns of the fund. If the NAV of a fund increases from Rs 20 to Rs 100 in one year, this could mean the assets under management (AUM) have increased due to the performance of the underlying assets or a greater number of investors have invested in the fund. If the NAV of the fund decreased, then it could either mean the fund is not performing well or that the fund faced a lot of redemption.
It is important to note that the value of NAV doesn’t have an impact on the returns. In other words, a high or a low NAV of a fund doesn’t make the returns higher or lower. More than the NAV of the fund, the timing of your investment is important as it helps in deciding the NAV at which you invest.
The Securities and Exchange Board of India (SEBI) has defined a cutoff time to decide at which NAV will you be allotted mutual fund units. The following table summarizes the cut off timings for different mutual fund schemes. These rules also apply to the redemption of mutual funds.
How is NAV allotted for different investment types?
The NAV allotment varies for different investment types, such as lumpsum, SIP, and other transactions.
- Lumpsum: In the case of lumpsum investments, if the payment is made through cheque, then the day the cheque is realized is when the NAV is allotted. If the payment is made through RTGS, NEFT, or UPI, then the NAV is allotted on the day the payment is received.
- SIP Investments: For SIP investments, irrespective of the payment mode, the NAV is allotted on the day the payment is credited to the AMC’s account.
- Other transactions: For NFOs, the NAV of the allotment date is final. In the case of switch transactions, the NAV will depend on the day the money is paid out by the switch-out fund.
Conclusion
NAV is a valuable tool for tracking the performance of a mutual fund. However, it shouldn’t be the sole deciding factor for investing in a mutual fund. Along with NAV, you must also consider other factors such as past performance, standard deviation, and fund manager’s experience to make sound investment choices.
Frequently Asked Questions
How is NAV calculated for mutual funds?
The NAV is calculated by subtracting the liabilities from the assets and dividing it by the total number of outstanding mutual fund units. The following is the formula for calculating NAV.
NAV = (Total assets – Total Liabilities)/ Total number of units
When is NAV allotted in mutual funds?
NAV is allotted based on the timing of the investment. If you invest before 3 pm for equity funds, and 1:30 pm for liquid and overnight funds, then the same day NAV is allotted. However, if you invest after the cutoff time, then the next day's NAV is allotted.
How does NAV impact returns in mutual funds?
NAV of a mutual fund doesn’t directly affect the returns in a mutual fund. However, the change in NAV over a period of time will help in determining the returns of a mutual funds.
Do mutual fund NAVs change daily?
Yes, mutual fund NAV changes daily as it tracks the value of underlying assets. Since the value of the underlying assets changes daily, the NAV also changes daily.
What is the difference between NAV and AUM?
NAV is the per unit value of the mutual fund, whereas AUM is the total value of the assets held by the mutual fund. NAV is derived by dividing AUM by the total outstanding units.
How does a fund manager decide on NAV?
The fund manager doesn’t decide the NAV, it is calculated based on the AUM of the fund and the number of outstanding mutual fund units.
How do high NAVs affect mutual fund investments?
A high NAV doesn’t impact the mutual fund performance. There is a common misconception that if the NAV is high, the returns will be higher. NAV is simply the per unit value of the fund and doesn’t impact the returns in any way.
Is a low NAV better for mutual fund investments?
A low NAV of a fund doesn't make it a good investment, as NAV isn't a direct indicator of the performance of a fund or potential returns. Moreover, a low NAV doesn't mean the fund is underperforming, or it is a good investment. You must consider other factors like past performance, alpha, standard deviation, and fund manager's expertise while deciding the fund to invest in.
What is NAV cutoff timing in mutual funds?
For all funds, the NAV cutoff timing is 3 pm, and for liquid and overnight funds, the cut-off timing is 1:30 pm.