When delving into the world of mutual funds, you might have come across the term ‘NAV’. But what exactly is NAV or Net Asset Value, and should it guide your investment choices? We explore.
Mutual Fund - Net Asset Value
Net Asset Value, or NAV, represents the market value of a mutual fund scheme’s assets divided by the total number of units. To find out the NAV, divide the total market value of the scheme’s investments by the number of units. For instance, if the market value of securities of a mutual fund scheme is Rs 300 lakh and it has issued one million units, the NAV is Rs 30 per unit (Rs 300 lakh / 1 million units).
NAV fluctuates daily according to the changes in the market value of the securities. You can find NAVs on the mutual fund websites and on the Association of Mutual Funds in India (Amfi) website, too.
Mutual fund NAVs are declared at the end of each trading day after the market closes. Domestic mutual funds are required to disclose the NAVs of all schemes by 11 pm on the trading day (T day).
“Further, units of mutual fund schemes under all schemes (except liquid and overnight funds) are allotted only at prospective NAV, i.e., the NAV that would be declared at the end of the day, based on the closing market value of the securities held in the respective schemes,” Amfi says.
After the new fund offer (NFO) period, the cost per unit you pay when you buy a fund is denoted by the NAV. It is the sale price per unit, which is equivalent to NAV on the date of subscription. When you want to sell your units, the redemption price is also calculated based on the NAV after deducting the exit load, if applicable.
Also Read: Understanding STP in Mutual Funds
Key Factors To Note
NAV is not to be considered as a mutual fund’s report card and neither should you use that as a metric for your investment in a scheme.
Many mutual funds have NAVs of Rs 10, while many have NAVs exceeding Rs 1,000. A high NAV only shows growth of the fund from its starting NAV, which is usually Rs 10, but not necessarily how long it took to reach this NAV. Also, a high NAV doesn’t guarantee that the fund is beating benchmarks. However a high NAV indicates longevity of the fund, fund stability, and investor trust.
Ultimately, the NAV alone isn’t a deal-breaker. Two funds, one with high NAV and another with low NAV, will yield similar fund appreciation if they invest in the same portfolio.
In the world of mutual funds, NAV is just one of many factors to consider. When making investment decisions, remember to assess the mutual fund scheme’s overall performance, track record, and your own financial goals.
