One of the most frequent terms associated with a mutual fund is net asset value (NAV). The performance of a particular scheme of a mutual fund is determined by NAV.
NAV reflects the value of assets of the mutual fund minus its liabilities divided by the number of mutual fund units outstanding.
As the market value of securities changes every day, NAV of a scheme also varies on a day to day basis. An investor can view the mutual fund NAV history in order to check how a particular scheme has been performing.
To illustrate, if the market value of securities of a mutual fund scheme is Rs 100 lakh and the mutual fund has issued 10 lakh units of Rs 10 each to the investors, then the NAV per unit of the fund is Rs 10 (i.e.100 lakh/10 lakh).
As per SEBI regulations, NAV is required to be disclosed by the mutual funds on a daily basis.
Mutual fund NAV helps the investors to evaluate their investment by comparing the current NAV with the NAV at which they purchased units of the scheme. Mutual fund NAV history of a scheme is available for download on the website of the Association of Mutual Funds of India (AMFI) as well as the website of the mutual funds.
Importance of mutual fund NAV
Mutual fund NAV plays an important role in the investment decisions made by an investor as it represents the market value of a mutual fund unit. However, the growth of NAV depends on the performance of the underlying assets. Therefore, it is important to look at the performance of a scheme as opposed to just looking at the absolute value of the NAV.
To illustrate, you are investing in two schemes that have the same portfolios. One scheme has is older and has a higher NAV. The other scheme has a lower NAV. The investment amount is identical in both the funds. You would get a number of units in the scheme with lower NAV and fewer units in the scheme with the higher NAV.
However, you would earn the same returns as the underlying assets of both the schemes are identical. Therefore, any appreciation or deprecation of investments of those assets will have identical impact on both the schemes.
In case the amount of investment in the different schemes (with different portfolios) is the same, the mutual fund NAV cannot be the guide to make an investment decision. In such cases, the investor should look at the returns given by the scheme. In the case of open-ended mutual funds, mutual fund NAV is an important factor for tracing the share price movements. However, it is not the best tool for assessing overall fund performance.
How to calculate mutual fund NAV?
It is very easy to calculate NAV. You can obtain the mutual fund NAV by dividing the total net assets by the total number of units issued. To calculate the total net assets of a fund, subtract the liabilities from the current value of the mutual fund’s portfolio of assets. Divide the figure by the total number of units of the mutual fund which are outstanding. The number you obtain represents the NAV of the mutual fund.
The formulaic representation of NAV is:
Net asset value (NAV)= Assets – Debits / Number of outstanding units
The mutual fund NAV is calculated on a daily basis. All mutual fund houses make an estimation of the portfolio once the stock market closes for the day at 3.30 pm. When the market opens on the next day, it starts with the previous day’s closing share prices. The fund houses need to deduct every expense or liability for the day to calculate Net Asset Value of the day using the above formula.
The NAV per unit of all mutual fund schemes is updated on the website of the AMFI as well the website of the mutual funds by 9 pm of the same day.
Does the time of investment or redemption of a mutual fund have an effect on its NAV?
Yes, it does. If you invest before 3 pm on a working day, you will be able to get the same day’s NAV. But if you purchase after 3 pm, you will get the subsequent day’s NAV for your mutual fund units.
I have invested in a debt mutual fund. Will the NAV fluctuate on a day to day basis?
Mutual fund NAVs of debt schemes keep changing due to the changes in interest rates. It is also affected by the profits fund managers make by selling and buying fixed income instruments like bonds and debentures. Having said that, daily changes in mutual fund NAVs are not so drastic as in equity funds.
Can mutual fund NAV history give me a better sense of the performance of a particular scheme?
Yes, it can give you an idea about how the scheme has been performing and how long the scheme has been around. But be mindful that NAV is dependent on the changes in the underlying asset and cannot serve as your only guide to evaluate a scheme.
What is the difference between the NAV of a mutual fund and share price?
The share price represents the value of equity of a company as quoted on the stock exchange. The demand-supply and company’s projected performance has a bearing on the share price. This is why the market value and book value of shares matter.
Book value represents the value of the company according to its balance sheet. On the other hand, market value is the value of a stock or a bond, based on the traded prices in the financial markets. That’s why the stock market price of a share is different from its book value.
However, in the case of a mutual funds, there is no market value for the mutual fund unit. Therefore, if the units of a mutual fund are purchased at its NAV, it is similar to purchasing it at its book value.