The market value of all the securities owned by the mutual fund scheme is known as net asset value or NAV. The NAV shows the success of a mutual fund. Read this blog to learn more about NAV.
Many investors tend to consider a mutual fund’s historical performance to invest in the same. They need to inquire whether this mutual fund will continue to perform effectively in the future or not. But what is NAV? Don’t worry, everything concerning NAV will be discussed in this article.
What is NAV?
The market price of all securities a mutual fund scheme holds is net asset value (NAV). A mutual fund scheme’s performance is indicated by its NAV or net asset value.
The market price of the securities in the mutual fund scheme divided by the total number of units in the mutual fund on any given date will give you the NAV per unit of the managed fund.
In layman’s terms, NAV is the cost of your mutual fund scheme’s units. The unit cost of a mutual fund unit typically starts at ₹10 and increases as the fund’s assets under management increase. The price of mutual funds’ NFOs, or new fund offerings, is fixed at ₹10. A lower NAV, however, does not necessarily imply a less expensive mutual fund, as you must realise.
You can calculate Net Asset Value by dividing total assets by total liabilities and multiplying that result by the total amount of outstanding units. The formula to determine a fund’s NAV is as follows: (Total Assets – Total Liabilities) / the total amount of outstanding units is the numerator (NAV).
How is NAV Relevant to Investors?
A mutual fund’s Net Asset Value shouldn’t be your main point of attention. For instance, if their Net Asset Value is lower, you only choose mutual fund schemes. The mutual fund scheme’s potential for growth is not reflected in NAV. The cost at which you can buy or sell shares of a mutual fund plan is all specified.
When engaging in a mutual funds scheme, you can think that the NAV of the fund is not very important. But to reach your financial objectives, you must base your investment choices on your investment strategies, risk tolerance, and time horizon.
What is the Difference Between NAV & Market Price?
It’s possible that a mutual fund’s Net Asset Value and share market price aren’t the same. The supply and demand for a share and the analysts’ predictions of the company’s future performance will decide its market price.
Your demand for a mutual fund is not based on its net asset value. Units of mutual funds are purchased at book value. After the trading day, the AMC will decide on NAV. All underlying stocks in the mutual fund scheme’s closing market values are considered.
How is NAV Calculated?
Net Asset Value calculation is easy if you are well-aware of the steps involved. Here’s a detailed process to do so –
General Net Asset Value Calculation
You can buy ten units of a mutual fund if you invest ₹5,000 in one with a Net Asset Value of ₹500. You may invest ₹1 lakh each in Mutual Fund Scheme A and Mutual Fund Scheme B, for instance. Mutual Fund Scheme A’s Net Asset Value is ₹10, whereas Mutual Fund Scheme B’s Net Asset Value is ₹20.
The following is how your mutual fund scheme unit allocations are: Mutual Fund Scheme A: 10,000 units at ₹1,000,000 / ₹10 Mutual Fund Scheme B: 5,000 units at ₹1,000,000 / ₹20.
Daily NAV Calculation
After daily market hours, all mutual funds determine the current value of the securities. Using the provided method, the mutual fund company subtracts all existing obligations and costs to get the net assets (NAV) for the current day. Net Asset Value equals [Assets – (Liabilities + Expenses)] / Amount of unpaid units.
The readily available securities and cash make up a mutual fund scheme’s assets. Equities, debentures, bonds, commercial paper, and other items used in the money market are all considered securities.
The fund manager subtracts all liabilities and management costs. The NAV is computed by subtracting required obligations from the total value of the money and securities in a mutual fund’s portfolio and dividing that result by the number of outstanding units.
How Does Investment Timing Affect NAV?
Anywhere you purchase mutual funds, you should consider the following guideline. Subject solely to the presence and realisation of money in the bank accounts of the AMC before the appropriate cut-off timing for the purchase transactions, mutual fund purchases made after 1 February 2021 will get the applicable NAV. You should be aware that interbank transfer delays might cause the monies to arrive at the AMC the day after the current business day.
SEBI has reset the NAV cut-off times for all mutual fund schemes to 3 PM for subscription and redemption. For all mutual funds, it applies regardless of the investment amounts. Liquid and night funds for plans costing much more than ₹2lakhs; however, these laws do not apply because there are existing rules for these types of funds. As of 1:30 PM on the pertinent business day, you may subscribe to liquid and overnight schemes. The mutual fund units must be redeemed or sold before 3 PM.
For instance, AMC acquired ₹75,000 from you before the deadline of 3 PM on 10 February 2021 (time-stamped). You will receive the closing NAV on 10 February 2021 if the financial institution receives the money in the bank before the deadline of 3 PM on that day. However, if the money arrives in AMC’s bank account after the cutoff time of 3 PM, you will receive the NAV for the following business session (11 February 2021).
What happens when mutual fund units are redeemed? You receive the NAV for that business day when the redemption process is accepted either by AMC up to 3 PM on a work day.
On the other hand, if the transactions are processed after 3 PM, the NAV for the following business day is used.
| Type of Transaction | Whether transacted before the cut-off time | Whether amount received by the scheme before cut-off time | Applicable NAV |
| Purchase and SIP Instalment | Yes | Yes | Same-day business day NAV |
| Yes | No | NAV of the business day when the cash is received by the plan before the deadline | |
| No | Yes | NAV on the business day that the time stamping is completed before the deadline | |
| No | No | When the plan receives the cash before 3:30 p.m. on a business day, its NAV |
Role of NAV in Fund Performance
Many investors believe that net asset value and stock price are comparable. As a result, they think a fund with a smaller net asset value is more affordable and, thus, a better investment. In actuality, it does not reflect the performance of mutual funds. A fund’s worth alone does not indicate whether it is a good investment. As a result, it shouldn’t be the sole criterion used to select a mutual fund.
Illustration – Role of NAV in fund performance
Let’s examine the two funds we choose randomly. On 21 September 2017, Focused Bluechip Equity’s NAV was 38.53, and Frontline equities were 215.77. The net asset values of the two funds are noticeably different, though as the table beneath demonstrates, their performance is comparable.
Basically, none of your fund choices should be influenced by the NAV. It essentially displays the performance of the underlying assets. The NAV of the ICICI Prudential fund is noticeably lower than that of the Birla Sun Life fund in the accompanying table. It is not, however, a reliable gauge of fund performance. To make an informed choice, you must consider the returns from your investment horizon.
| Fund name | NAV (₹) | Launch date | AUM (₹) | 1-year returns (%) | 3-year returns (%) | 5-year returns (%) |
| Birla Sun Life Frontline Equity | 215.77 | 30 August 2002 | 18,948 crore | 17.71 | 13.35 | 19.33 |
| ICICI Pru Focused Bluechip Equity |
38.53 23 |
May 2008 | 14,337 crores | 18.37 | 11.94 | 17.63 |
Conclusion
To comprehend how a fund operates daily, it is helpful to grasp the net worth of an asset. It doesn’t show how profitable a fund is. As a result, before selecting to invest in something, investors should research the current cost of money and its past success. If you need any assistance with any scheme or plan, Vakilsearch can help you. Get in touch with us today.
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