What is Net Asset Value in Mutual Funds and How Is It Calculated?

Both the total number of units distributed to investors by a mutual fund and the total assets of the scheme play a key role in determining the NAV of a mutual fund. However, there is another factor to keep in mind – the liabilities of the mutual fund scheme.

The liabilities of a mutual fund are primarily the costs related to management of the scheme. The Asset Management Company (AMC), which administers the fund, must pay a number of costs that comprise the liabilities for the mutual fund. These costs include administration fees, custodial expenses, distribution and brokerage commissions, marketing budgets, investor education initiative expenses, and much more.

The Net Assets of a mutual fund are obtained after deducting these costs (or liabilities) from the total value of assets i.e. investments held by the scheme. To get a clearer picture of how these 3 factors – total assets, total liabilities and total outstanding units impact the NAV of a fund, let’s take a closer look at the NAV calculation formula.

Net Asset Value Calculation Formula

The formula for calculating NAV of mutual funds is as follows:

NAV = (Total Assets – Total Liabilities) / Total number of outstanding units

Or

NAV = (Net Assets of a Mutual Fund) / Total number of outstanding units

In the above NAV calculation formula, the total number of outstanding units is the sum total of all units distributed by the mutual fund to all its investors. The NAV calculation formula uses the total assets and total liabilities of a mutual fund calculated at the end of each day, so the net asset value of mutual funds only changes once daily. 

Therefore, if the opposite to the above happens, the NAV of the fund will decrease. An increase in NAV typically indicates good performance by the mutual fund, which leads to higher profits for the investors. While a decrease in NAV indicates poor performance by the fund which potentially can lead to a loss for the investor.

How is NAV Relevant for Investors?

Investors who try to time markets typically want to make lumpsum investments when the NAV of a fund is low and redeem when the NAV of the fund increases. This difference between selling NAV and purchase NAV is expected to maximize the profits from the investment. While this is possible in theory, it is extremely difficult to implement in practice as market movements and changes in mutual fund NAV can be very hard to predict.

So, instead of concentrating on just on a mutual fund's NAV and trying to time markets, investors should instead focus on being systematic with their investments and stay invested in the long term. By making systematic and regular investments such as through a systematic investment plan (SIP), investors can benefit from rupee cost averaging which reduces the impact of changes in NAV on the overall investment. Additionally, by staying invested longer, mutual fund investments especially equity-oriented investments will get more time to grow. This will allow the investor to benefit from the power of compounding to the fullest.

What is the Difference between Share Price and NAV?

Mutual Fund NAV is calculated only after conclusion of the business day using the closing price of stocks and bonds the scheme has invested in. So, NAV of a mutual fund can change only once daily.

Frequently Asked Questions (FAQs)

Q1. Can the NAV of a fund be negative?

The absolute value of mutual fund NAV can never be negative. However, the change in NAV can be negative over a specific period of time, if the scheme’s investments have performed poorly during the chosen period.  

Q2. What does a low NAV mean? 

A low NAV would mean a higher number of units can be purchased and a high NAV would mean a lower number of units will be purchased. However, purchasing mutual fund units at a low NAV does not have any bearing on how well the investment will perform in the future.

Q3. How can we interpret NAV? 

At the time of introduction of a new scheme or New Fund Offer (NFO), mutual fund units all have a the same NAV of Rs. 10. As time passes, the NAV of the fund grows if it performs well and its investments grow with time. Similarly, the NAV of the fund decreases if the value of securities of a fund declines with time.

However, for investors, only the amount invested and the returns generated actually matter, while the scheme NAV and number of units purchased are, in fact, irrelevant.

Q4. Does Timing have an Impact on NAV? 

Yes, the timing of your investments can have an effect on the Net Asset Value at which you can purchase fund units based on the cut-off time. If the fund house receives funds for investment before the cutoff time, same day NAV i.e. the NAV of the fund for the current business day will be applicable. Whereas, if investments are received after cut-off time, NAV of mutual fund for the next business day will be applicable. The cut-off timings of different mutual funds are as follows: