Net asset value (NAV)

Net asset value (NAV) Whenever you’re looking for a Mutual Fund, you’ll inevitably come across a term referred to as NAV. NAV …

Net asset value (NAV)

Whenever you’re looking for a Mutual Fund, you’ll inevitably come across a term referred to as NAV. NAV stands for Net Asset Value and is a vital metric when evaluating and comparing Mutual Funds. It is critical for you as a Mutual Fund investor to have sound knowledge of the NAV of the Mutual Fund scheme you wish to invest in. The type of Mutual Fund scheme (growth or dividend) also has an impact on its NAV.

What are Mutual Funds?

A brief recap — a Mutual Fund is a pool of money sourced from its investors and managed by professional fund managers. These managers take these funds and invest them in assets like stocks, securities, bonds. Mutual funds are primarily managed by money managers with solid financial understanding and experience so that they can efficiently invest this money and deliver high returns.

If you’re invested in a Mutual Fund, you and your fellow investors will participate in the same fate as the fund. The managers of a Mutual Fund invest in a large number of securities, and its performance is tracked meticulously. Mutual funds offer a wide variety of schemes — such as equity schemes, money market schemes, hybrid schemes, fixed income schemes, ETFs etc.

What is NAV?

The value per unit of a Mutual Fund on a specific date is referred to as its NAV. This is a simple definition, but there is a lot more to it. The NAV of a Mutual Fund can be considered as its book value. When you order a Mutual Fund scheme at a listed NAV price, that price is actually the price as of yesterday’s closing NAV. So when your order is executed, the units that will be provided to you will be based on the updated NAV at the end of the current trading day. Because of this, you may not know the exact NAV at which your orders will be executed.

It’s important to know this fact. For example:

  • If you want to buy ₹1,00,000 worth of Mutual Fund A, and the NAV as of yesterday’s close was ₹10, that would mean you will get 10,000 units.
  • But, when the NAV of the Mutual Fund increases on the day your order gets executed, you would actually be getting lesser units you originally predicted.
  • For this reason, you can buy or sell Mutual Fund schemes in ‘Rs’ instead of ‘units’.

What is a Mutual Fund’s NAV?

The NAV of a Mutual Fund scheme is computed after each day of the active stock market. It’s based on the stocks of the companies the Mutual Fund holds in it portfolio, and their closing market price. If you wish to buy a Mutual Fund, your orders will be executed as per the NAV of those schemes on that particular day. Changes in NAV is not considered as the best way to measure a fund’s performance — you should instead look for the annual returns of the scheme. Because Mutual Funds trade much like the stock market, the NAV changes every day — it moves in comparison with the prices of the securities included in the portfolio of the scheme.

When you want to sell a Mutual Fund scheme you own, you may not necessarily be able to sell at the closing NAV. Sometimes, when you are redeeming your investment from a scheme too early, an exit load is charged as a percentage of NAV. So your selling price can be lower than the present NAV of the scheme.

For example:

  • Suppose you are investing ₹10,000 in a scheme which has NAV of ₹50. You will receive 200 units.
  • Now, assume the NAV of the scheme increases to ₹55 in 6 months, and you want to redeem it.
  • You will receive ₹11,000. But if exit load is applicable at the rate of 1%, you will get ₹10,890 (200 units X ₹54.45 NAV minus the exit load).

 

Misconceptions about NAV

NAV is just the book value of a Mutual Fund scheme. Other than that, it has nothing to do with any overvaluation or undervaluation of a Mutual Fund that anyone may indulge in. Many investors have a perception that a fund valued at ₹10 is cheaper than a fund valued at ₹100. Sometimes, funds with the same portfolio can have different NAVs. Investors carry this wrong perception about NAV of a Mutual Fund scheme because they compare it the market price of an equity share.

Does NAV matter?

Many investors have a false perception that lower NAV can give them a better return. Returns from Mutual Funds are independent of NAV. To make this clear we can look into these examples:

  • Let’s suppose you want to invest ₹1,00,000 in a Mutual Fund scheme. You have decided to go with Fund A or Fund B.
  • But say one Fund A has a NAV of ₹100 and another Fund B has NAV of ₹500.
  • You will get 1,000 units of Fund A or 200 units of Fund B.
  • After one year, let’s say they have grown equally by 25%.
  • Then NAV after one year would be ₹125 for Fund A and ₹625 for Fund B.
  • The value of your investment would be 1000*125 = ₹1,25,000 for Fund A and 200*625 = ₹1,25,000 for Fund Y.
  • Thus your returns are the same if the NAV of both the schemes were different.
  • The change in NAV value of a scheme over time is what is important and not the absolute NAV value itself.

Some factors that actually affect the returns of a scheme are:

  • The quality of the fund,
  • The efficiency of the fund managers, and
  • The quality of the stocks it holds.

A Mutual Fund scheme with higher NAV which invests in IT companies may perform better than a Mutual Fund scheme with lower NAV which invests in Jute companies as IT industries typically perform better than jute industries.

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