The world of mutual fund gets discussed mostly on performance returns. But, one factor that tells the story of returns is the net asset value or NAV. When you invest in any mutual fund, you are allotted units at a certain price. This price, measured per unit, is called the NAV or the Net Asset. Just the way a bond or a share is sold at a price, a mutual fund is bought and sold at its NAV. The NAV is arrived at by dividing the fund’s net assets by the number of outstanding units.
A mutual fund, as you would know is an indirect way to invest in stocks and the bond markets. In case of the bond markets, certain bonds, especially sovereign bonds are not easily available to retail investors, which is where mutual funds come into play—they allow small investors access to invest in such instruments. What a mutual fund scheme invests, and its value is what is known as the fund’s assets or assets under management. Likewise, there are certain liabilities that are present in the fund’s balance sheet like expenses incurred towards fund management, which is deducted from its assets to get the net assets.
Simply put, the net assets are defined as assets minus liabilities. Mutual funds compute the share of each investor on the basis of the value of net assets per unit, commonly known as NAV. The formula to arrive at the NAV: Net assets of scheme/Number of units outstanding. Depending on the period of your holding of the assets and the applicable charges, when you sell the units that you have in the fund that you have invested, there may be an exit load, depending on the scheme. The NAV of a fund is disclosed on a daily basis in the AMCs website and frequently in leading dailies.
By calculating the NAV or net asset value of your scheme on any given day, you know how much your investment is worth on that day. Although you sell or buy units on NAV, there might be an additional exit or entry load to pay. Tracking the NAV regularly is the best way to track your mutual fund investment.
Importantly, a fund’s performance depends largely on the fund manager’s management abilities, which is also reflected in its NAV. The fund manager decides which stocks to buy, and when to sell, which in turn impacts your NAV. Likewise, the NAV is affected each time an investor buys into the fund or sells units. As the NAV is largely shared profits made from the fund’s investments, the more the number of units, the less the share per unit and vice-versa.
Your fund’s NAV is adversely impacted when there is a large-scale redemption of units. Usually, all mutual funds maintain a small cash reserve to meet redemption, but large-scale redemption may force the fund manager to sell stocks to raise the money. This may be done at an unfavourable price and your NAV will suffer. If your fund manager sells stocks expected to go up in future, the interests of existing investors is affected as they are deprived of future gains.
There is another aspect that impacts NAV – dividend declaration and distribution. Any gains like dividends that are distributed from your portfolio ultimately come from your NAV. Since dividends are paid out of your NAV, it will be reduced to the extent of the amount paid. If your scheme’s NAV is, say, Rs 10 and it goes up to Rs 15, and the fund decides to pay a dividend of Rs 5, your NAV will be reduced by Rs 5 to come back to Rs 10. The Rs 5 comes to your hands as dividend income. So, the next time when you look at the NAV of the fund you have invested in, understand that it reflected the realisable value of your investments times the number of units you hold on that day in the fund.
