Mutual funds are one of the most popular investment options in India, as they offer diversification, professional management, and liquidity. However, before investing in any mutual fund scheme, it is important to understand how its performance and value are measured. One of the key indicators of a mutual fund’s performance is its net asset value or NAV. In this article, we will explain what NAV is, how it is calculated, and what it means for investors.
Net asset value formula
The formula for calculating mutual fund NAV is:
NAV = (Total Assets - Total Liabilities) / Total units
Assets = Market value of investments+ Receivables+ Accrued income+ other assets
Liabilities = Accrued expenses+ Other liabilities and payables
For example, suppose a mutual fund has Rs. 100 crore invested in securities and Rs. 10 crore in cash, for total assets of Rs 110 crore. The fund has liabilities of Rs. 5 crore, which include management fees payable, operating expenses and other charges payable. The fund has 10 crore units outstanding. The NAV of this mutual fund will be calculated as:
NAV = (110 crore – 5 crore) / 10 crore = Rs. 10.5 per unit
How is NAV calculated?
NAV is calculated by the fund house at the end of each trading day, based on the closing market prices of the portfolio’s securities. The fund house updates the NAV on its website, on the websites of the Association of Mutual Funds in India (AMFI) and the Securities and Exchange Board of India (SEBI). Investors can also check the NAV of various mutual funds on online platforms like Bajaj Finserv.
The relationship between NAV and mutual funds
NAV is an important indicator of a mutual fund’s performance, but it is not the only one. Investors should also consider other factors such as the fund’s objectives, strategy, portfolio composition, risk-return profile, expense ratio, and past returns.
NAV alone does not tell us how well a fund has performed over time, or how it compares with other funds in the same category or benchmark. For that, we need to look at the returns generated by the fund over different time periods, such as one year, three years, five years, or since inception. Returns are calculated by comparing the change in NAV over a period with the initial NAV at the beginning of the period.
When is NAV calculated?
NAV is calculated at the end of each trading day, after the stock markets close. However, the NAV that investors get when they buy or sell units of a mutual fund depends on the cut-off time of the fund.
The cut-off time is the time before which an investor’s application for purchase or redemption of units is accepted by the fund house for that day’s NAV. The cut-off time for equity and debt funds is 3 pm, while for liquid and overnight funds, it is 1.30 pm. If an investor submits the application before the cut-off time, they will get the same day’s NAV. If they submit it after the cut-off time, they will get the next business day’s NAV.
What does a high or low NAV indicate?
A common misconception among investors is that a low NAV means a cheap fund, and a high NAV means an expensive fund. However, this is not true. NAV is just a reflection of the market value of the fund’s assets, and it does not indicate the quality or potential of the fund.
A low NAV may mean that the fund is new, or that it has underperformed in the past. A high NAV may mean that the fund is old, or that it has performed well in the past.
The NAV of a fund does not affect its returns if the proportionate change in NAV is the same as the proportionate change in the market value of the fund’s assets. Therefore, investors should not base their investment decisions on the NAV of a fund, but on its performance, risk, and suitability for their goals.
NAV is an important metric to understand and track the value and performance of a mutual fund. However, it is not the only factor to consider while investing in a mutual fund. Investors should also look at the fund’s profile in detail, and compare it with other funds in the same category, before making any investments.
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