NAV Meaning In a Mutual Fund?

Mutual Funds, in recent years, have become one of the most popular choices of retail investors; however, still majority of investors find it difficult to understand some of the most crucial aspects of mutual funds, and one such aspect is NAV. Often, a question comes from most investors that What is the NAV in a mutual fund? It is important to understand what NAV stands for, why it’s important, how it is calculated, calculation frequency, and more.

So, in this article, we have got you covered. Here you can learn about NAV in a mutual fund, the NAV formula, types of NAV, and lot more. 

Understanding NAV in Mutual Funds 

If you are investing in mutual funds or about to start your journey, you must have heard or seen this word – NAV. So, what is nav meaning? Or what is nav full form? These might be some of the common questions you are thinking about, aren’t you? 

So, NAV stands for Net Asset Value, which is used to represent the per-unit value of a mutual fund. In simple terms, this is the price of each unit of a mutual fund at which the mutual fund buyer or seller can buy or sell the unit of that fund. 

So, if you are wondering what is NAV? you must understand that NAV is of immense importance in mutual funds. It is one of the most crucial measures of a fund’s performance that investors use to monitor their investments.

As there are different types of mutual funds, the frequency of calculating NAV for the mutual funds varies across the fund’s structure. For open-end funds, you will see the NAV changing daily at the end of market sessions, while for closed-end funds, the NAV is derived either weekly or monthly. 

Key Characteristics of NAV in Mutual Funds 

1. NAV is not Stock Price: Often, people confuse NAV with stock prices, but they are not the same. While stock prices change throughout a trading session, NAV is calculated and updated only at the end of the trading session or weekly or monthly. 
2. Not a Performance Indicator: NAV tracked over a long period of time might be used for understanding a fund’s performance. However, NAV alone cannot give a complete picture of the performance. If the NAV is low, that doesn’t necessarily mean the fund is cheap, and if high, that doesn’t mean it is expensive.
3. Basis for Transactions: This is the price of each unit of any mutual fund, so when you buy or sell any fund, this is the base price you have to pay or you will receive. Expenses are Adjusted: NAV is adjusted for the fund’s expenses, such as management fees, custodian fees, registrar fees, and other charges. 
4. Calculation Frequency: As stated above, the frequency of calculation of NAV for mutual funds varies depending on the structure of the fund. For open-end funds, it is daily, while for closed-end funds, it is weekly or monthly. 

How is NAV calculated?

For calculating NAV, you would need to use the NAV formula, which is as follows – 

NAV = (Market Value of Securities of a Scheme – Total Expense) / Total number of units of the scheme

Here;

Market Value of securities means the total value of the investments that the scheme has made in different securities. 

Total expense includes management fees, custodian fees, and other such expenses of running the scheme.  

So, if the total market value of securities of a mutual fund is ₹1000000000, total expenses are ₹1000000, and the number of units issued by the scheme let’s say 10000000 units. Then,  

NAV = ₹ (1000000000 – 1000000)/10000000 

= ₹999000000/10000000 

= ₹99.9 per unit.

Often, NAV is considered the purchase or share price, which is again a myth. NAV is the base price, which needs to be adjusted as per the nature of the transaction, that is, with entry and exit loads, if any, to derive the purchase and redemption prices, respectively. 

For instance, taking cue from the above example, if there is an exit load of 2% on the scheme, then if you are redeeming your mutual fund units, the above NAV will be adjusted and the redemption price per unit will be = ₹99.9 (1-0.02)

= ₹97.9 per unit. 

How is the Applicable NAV Determined?

One of the most crucial factors that investors often miss is the determination of the NAV that is applicable to a transaction. As per AMFI, the applicable NAV is determined as follows – 

Nature of Transaction	Liquid Funds or Overnight Funds		Other Funds
Subscription/Purchase	Application received within 1:30 p.m. & funds available for utilization before 1:30 p.m. without a credit facility	Closing NAV of the day immediately preceding the day when the application is received	Application received within 3 p.m. & funds available for utilization before 3 p.m.	Closing NAV of the day when the application is received
	Application received after 1:30 p.m. & funds available for utilization without a credit facility on the same day	Closing NAV of the day immediately preceding the next business day	Application received after 3 p.m. & funds available for utilization	Closing NAV of the next business day
	Whether the application is received before or after 1:30 p.m., but funds are not available for utilization before 1:30 p.m., without a credit facility.	Closing NAV of the day immediately preceding the day when funds become available for utilization	Whether the application was received before or after 3 p.m., but funds are not available for utilization.	Closing NAV of the day when funds become available for utilization before 3 p.m., which is the cut-off time
Redemption/ Selling	Application received up to 3 p.m.	Closing NAV of the day immediately preceding the next business day	Application received up to 3 p.m.	Closing NAV of the day of receipt of the application
	Application received after 3 p.m.	Closing NAV of the next business day	Application received after 3 p.m.	Closing NAV of the next business day

Note:

• If the application is received through online mode, then the cut-off time is 7 p.m., which is applicable for overnight funds schemes. 
• Business day mentioned above doesn’t include the days when money markets are closed or not accessible.  

Importance of NAV in Mutual Funds

Understanding mutual fund NAV is important because of the following reasons:

• Allocation of units: If you are investing in a mutual fund through the SIP route, then you have a fixed amount that you are investing. Now, the number of units that will be purchased with that amount will depend on the mutual fund NAV of that scheme. If the NAV is higher, then the number of units will be lower, and vice versa. If you are investing a lump sum amount in any mutual fund scheme, then NAV will help you determine the number of units you can purchase as well; however, here you can increase or decrease your investment amount if you want to buy a specific number of units.  
• Understanding Cost Averaging: Cost averaging is one of the best parts of mutual funds when invested via the SIP route. As mentioned in the above point, the number of units allocated to the investor will depend on the applicable NAV for the investment. Now, as you are regularly investing, the NAV will differ for every month, and thus the number of units purchased will also differ. Now, by taking an average of the NAVs for all the investments in a particular period, you can get an average cost of your investment, which can be used for analyzing the performance of your investment, along with factoring in other aspects.  
• Long-term perspective: NAV helps in understanding a fund’s performance over time, basically over the long term. If you track the NAV of a mutual fund over a long period, and if it is growing, this means the fund is performing well, and vice versa. However, it doesn’t mean that a fund with a higher NAV is a better performer and vice versa. 
• Timing your investments: While it is impossible to time markets, however, if you are investing a lump sum in mutual funds, then NAV may help you in timing your investment, but that doesn’t guarantee higher returns. It is just that if NAV is lower at a certain point in time, or you have been tracking the NAV of mutual funds, and you see the NAV of certain schemes going down, or at its lowest, you may buy that as you can get more units of the fund allocated. However, this doesn’t mean that your investment will perform better. For that, you need to analyze other aspects of the fund.  

Factors Influencing NAV in Mutual Funds 

By now, you must have understood that Net asset value fluctuates, so why does it fluctuate? What are the factors that move NAV? Let’s find out –

•  NAV takes into account the weighted average market value of all the assets of a mutual fund. So, as the market value, or prices of these underlying assets, change, the NAV also changes.
• Every mutual fund has some expenses, which are adjusted into the NAV. So, when the expense ratio goes up, the NAV decreases, and vice versa.
• Market sentiment also affects the NAV, as if the overall market sentiment is positive and more people invest in the underlying assets, or in the mutual fund, then asset prices will rise, which in turn will help in pulling the NAV upward and vice versa.
• If the mutual fund house pays out dividends for any scheme, then the NAV of that scheme will fall as the dividend will be deducted from the total asset valuation. However, this doesn’t mean that the investors’ return will fall, as they are receiving the dividends, against which the NAV falls. 

Wrapping up 

Now, you must have got an idea of what NAV is in a mutual fund? Net Asset Value of a Mutual fund is crucial, and for every investor who invests in a mutual fund, whether via the SIP route or lump sum, NAV affects their investments. So, understanding NAV and using it for improving your investment strategy can be crucial. Check the NAV while investing and redeeming your funds. You can also track the NAV to check how the fund is performing over time. 

NAV in Mutual Funds | FAQs

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.