What Is NAV In Mutual Fund?

Whenever we consider purchasing a product, our first instinct is to check its price and compare it with similar products. The same instinct comes into play even when we make our investment choices. When we invest in equities, we always check if the stock is at a fair value or if it is expensive, and then decide if we want to invest in it. In the case of mutual funds, the net asset value, or NAV, is the equivalent of the price.

Let us explore what is NAV in mutual funds and how it is calculated.

In mutual funds, the investors are allotted units as per the amount they have invested. The price at which these units are purchased is the NAV or net asset value of the mutual fund. Essentially, the NAV of a mutual fund is the market value of all the assets held by the scheme. It reflects the per unit value of the mutual fund scheme.

Each mutual fund scheme invests in various equity and debt instruments to build its portfolio. Since the market value of these equity and debt instruments changes every day as they are traded on the exchanges, the NAV of the mutual funds investing in these securities also changes on a day-to-day basis. Any change in the prices of the invested securities influenced the net asset value of the mutual fund.

The net asset value of a mutual fund is calculated by taking the total value of the assets held by the scheme, deducting any liabilities and expenses from this amount, and then dividing it by the total number of units issued by the scheme.

So, the formula to calculate the NAV of a mutual fund is:

Net Asset Value (NAV)= (Total Assets - Liabilities) / Total No. of Outstanding Units

Let’s understand this with a simple example:

Let’s assume that the market value of the assets held by a mutual fund scheme is ₹5,00,00,000. Now, if the mutual fund scheme issues 20 lakh units to its investors, the net asset value of each unit of the mutual fund scheme is ₹25.

A mutual fund’s net asset value is always computed at the end of the day after the stock market closes.

The NAV of a mutual fund only reflects how many units can be allotted for a specific investment amount. As an investor, the number of units should not matter to you. What matters is how much your invested amount has appreciated in value. Hence, you must focus more on your returns and not so much on the NAV.

In this article, we have discussed the meaning of NAV in mutual funds and how the net asset value is calculated. Now, we know that the NAV only reflects how many units of the fund can be allotted for a specific amount. It is the book value of a mutual fund scheme.

So, when you invest in mutual funds, you must always check the performance of the scheme, and not concentrate much on its NAV. You can check the fund’s past performance by taking a look at its returns over the years.

And if you are new to the world of mutual funds, take a look at these 8 commonly used mutual fund terms that an investor should be aware of.