What is Net Asset Value?

Net Asset Value (NAV) refers to the per-unit value of a mutual fund scheme. The NAV is calculated by subtracting total liabilities from total assets and dividing the result by the total number of outstanding units. Like the stock price, the NAV also reflects value; however, as opposed to stock prices, which fluctuate during the trading hours, the NAV gets updated after market hours. It helps investors understand the current worth of each unit they hold in a fund. In this article, we explain what is NAV (Net Asset Value) in mutual fund, how it is calculated, its role and more . 

What is the Net Asset Value Formula? 

The Net Asset Value (NAV)  is calculated using a simple formula: 

NAV = (Total Assets – Total Liabilities) / Total Outstanding Shares. 

Understanding the Components 

Total Assets: 

This includes the market value of all investments held by the fund, such as shares, bonds, government securities, cash, and accrued income like interest or dividends. 

Total Liabilities: 

These are the fund’s obligations, including management fees, custodian charges, audit fees, and other operational expenses. 

Outstanding Units: 

This represents the total number of units held by all investors. The number changes as investors buy or redeem units. 

How is the Net Asset Value Calculated? 

To know what is the Net Asset Value of the fund, investors can follow steps below: 

Step 1: Calculate Total Assets :The closing market prices of all investments are considered, along with cash balances and receivables. 

Step 2: Calculate Total Liabilities : All expenses and outstanding payables are added together. 

Step 3: Determine Net Assets : Total liabilities are deducted from total assets. 

Step 4: Calculate NAV per Unit: Net assets are divided by the total number of outstanding units. 

Step 5: Publish NAV: The NAV is published after market hours and becomes applicable for transactions based on cut-off timings. 

Practical Example 

• Total Assets: ₹10,00,000 
• Total Liabilities: ₹2,00,000 
• Outstanding Units: 2,00,000 

Net Assets = ₹10,00,000 – ₹2,00,000 = ₹8,00,000 

NAV = ₹8,00,000 ÷ 2,00,000 = ₹4.00 

If an investor holds 1,000 units, the investment value would be ₹4,000. 

How Does Net Asset Value Work? 

What is NAV can be better understood by examining its mechanism. 

• Portfolio Valuation: 
  The fund first determines the total market value of all securities it holds. This includes equities, bonds, government securities, money market instruments, and cash balances. These are valued using their closing market prices. 
• Expense Adjustment: 
  All operating expenses of the fund are charged to the scheme. These include fund management fees, administrative costs, and distribution expenses, collectively known as the Total Expense Ratio (TER). 
• Liability Accounting: 
  Any pending payments or accrued expenses, such as fees payable to service providers, are recorded as liabilities. 
• Net Value Calculation: 
  The total liabilities are deducted from total assets to arrive at the net assets of the fund. 
• Unit Price Determination: 
  The net assets are divided by the total number of outstanding units to calculate the NAV per unit. 
• Daily Publication: 
  The NAV is published daily by the fund house after market closure and is available on AMC websites, financial portals, and regulatory platforms.
  Understanding what is NAV is crucial for investors, as it helps them evaluate the value of their mutual fund investments; further in the article, the role of NAV and the formula used to calculate the net asset value is discussed in detail. 

What is the Role of NAV in Mutual Fund Performance 

NAV is one of the key factors that can be taken into consideration to measure and compare the performance of a mutual fund over a period of time, but it should never be taken alone. Increase or decrease in NAV indicates that there is a corresponding increase or decrease in the values and their investments. 

A higher NAV does not mean that the mutual fund is expensive and better than one with a low NAV. For example, a new fund may have an NAV of ₹10, while an older fund following the same strategy may have an NAV of ₹100. What matters is the percentage change, not the absolute value. 

If, for example, the NAV of one fund moves from ₹50 to ₹55, while that of another from ₹100 to ₹110, both provide the same returns of 10%. Hence, individual investors need to look at returns, expense ratios, risks, as well as consistency, while assessing different funds. 

Disclaimer: All investments are subject to market risks, economic conditions, regulatory changes, and other external factors. Returns are not guaranteed and may vary based on market performance and investment tenure. Investors should assess their risk tolerance and financial objectives, conduct their own research, and consult a qualified financial advisor before making any investment decisions. 

Conclusion  

Net Asset Value (NAV) refers to the mutual fund value measured by the difference between its assets and liabilities. It plays an important role in calculating the mutual fund units. NAV has its significance in valuation but should always be taken into consideration in terms of returns, expenses, and risks. Investors who are concerned about their investments can make informed stock market-related decisions through a good stock market trading app.