What is NAV in mutual funds and why does it matter? | Mint

NAV is a significant parameter or indicator for mutual funds. It merely represents the unit price of a scheme of a fund. It is calculated by reducing the liabilities of a fund from its assets and then dividing by outstanding units.

NAV reflects the market value of investment of a fund and is a significant one to be aware of for sound investment decisions.

What is the formula for NAV?

Net Asset Value (NAV) is the unit price of a mutual fund scheme, calculated by subtracting the total liabilities of the fund from its total assets and then dividing that by the total units outstanding.

The formula for NAV is:

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

i.e., the total market value of all investments purchased in the mutual fund minus debt or liabilities.

Why should investors be interested in NAV?

• Unit price: NAV lays down the price at which a mutual fund unit is purchased or sold by the investors. It is, therefore, important to learn about NAV while investing.
• Tracking performance: Measuring a change in NAV over time helps the investors identify how well a fund had worked earlier.
• Valuation of a portfolio: NAV enables the investors to estimate the value of the units which they own in the mutual fund and ascertain their economic position lucidly.
• Shortfalls of comparisons: The higher the NAV, the better is the fund can never be true. Instead, growth percentage and general performance must take topmost priority while comparing the funds.

How is NAV computed and when is it announced?

NAV is generally computed on a daily basis for open-end mutual funds, and it is the value of the fund at the close of each trading day. The cut-off points for transactions are set by the Securities and Exchange Board of India (SEBI) in India; if the order is placed before the cut-off point, investors are provided with that day’s NAV.

Why is NAV important in mutual funds?

NAV is of extreme importance for investments in mutual funds, particularly while redeeming the fund. Redemption value is determined by multiplying the number of units being redeemed by the latest NAV up to the sale date.

NAV is the amount per unit in a mutual fund but is not a measure of profitability in the fund. An increase in more NAV does not necessarily mean higher performance. It is, in fact, a change in the NAV over a time period which indicates how a fund has been doing, both well or otherwise.

Thus, in mutual fund investments, NAV is important to know since it gives a snapshot of the per-unit value and is essential for purchase and sale decisions.

While the calculation of NAV helps investors estimate the value of their holdings, it has to be analyzed against other important factors such as past performance, expense ratio, and investment objectives. Experts suggest that a careful examination of these parameters can help investors make informed choices and achieve their monetary goals.