Shenoy has narrowed down on three mutual fund schemes that he wants to invest in. To make his final choice, he is looking at the net asset value of the funds.

“Should I invest in the scheme with a higher NAV or a lower NAV?” Shenoy asks his friend, Anvita.

Anvita asks, “Do you even know what is NAV in mutual funds?”

“Honestly? No,” Shenoy says with a sheepish grin.

Anvita explains, "The mutual fund NAV is the market value of one unit of the fund.”

Shenoy looks at her with a blank expression and she decides to break it down for him because she realises that it’s important to know the meaning of the net asset value in mutual funds to make the right investment decision.

What is NAV in mutual funds?

Mutual funds pool money from various investors and then invest that in various securities depending on the type of fund and its objective. For instance, an equity fund will invest a majority of its funds in the stocks of companies and other equity-related instruments. A debt fund, on the other hand, will invest primarily in fixed-income securities like bonds, government securities, etc.

Now, mutual fund investors are not actually given parts of the securities that the fund has invested in, in return for their money. Instead, they are given a unit or share of the fund itself. So, a mutual fund is divided into units that are allotted to investors according to the amount they invest. The per-unit market value of a mutual fund is called the Net Asset Value or the NAV.

Hence, NAV is essentially the price at which you buy a unit of any mutual fund scheme. It is also the amount you receive (minus the exit load) when you sell units of the scheme. To understand more about what is NAV in mutual funds and why it matters, let us look at all essential aspects that you need to know about.

How is mutual fund NAV calculated?

The net asset value of a mutual fund is calculated by dividing the total value of all the securities it holds along with liquid cash, minus liabilities, by the number of outstanding units. The formula for NAV is:

Net Asset Value = Assets – Liabilities

                              Outstanding units

Hence, the mutual fund NAV changes with a change in the price of securities that it has invested in. For instance, if the prices of stocks held by a mutual fund go up, the net asset value of the fund will also increase. Since prices of securities such as stocks change every day, the mutual fund NAV also is calculated and published on a daily basis for investors.

One of the common ways that investors look to earn from mutual funds is by gaining from the price change of the NAV. For instance, if you invest Rs. 20,000 in a mutual fund with a NAV of Rs. 100, you get 200 units of the fund. If, after a few months, the NAV goes up to Rs. 125 and you decide to sell the units, you will receive Rs. 25,000 minus the exit load, if any. The exit load in mutual funds is usually around 1%.

NAV cut-off and updating time

When buying and selling units, 3 pm is considered the cut-off time for mutual fund NAV. When buying the units of a mutual fund, if you buy them before 3 pm on a working day, you will get allotted units as per the NAV of that day. If you buy after 3 pm, you will get the units based on the NAV of the next working day. The same applies when selling mutual fund units.  

As per the guidelines by the Securities and Exchange Board of India (SEBI), the NAV of mutual funds is to be updated on the mutual fund’s website by 9 pm of the same day. The net asset value in mutual funds is only calculated once after the market closes because it’s tricky to calculate it live when prices are constantly changing.

Mutual fund NAV is not impacted by demand

It’s crucial to understand that the mutual fund NAV and how it works is different from the price of shares in the stock market. When it comes to the shares of a company, the market forces of demand and supply play an integral role and determine the price of the shares. The more investors want to buy the stock of a particular company, the higher the price of the stock goes and vice versa. The increase in demand could be because of a number of factors such as the release of financials such as profits, the future outlook, etc.

But when it comes to the net asset value in mutual funds, the demand and supply forces have no impact on it. That’s because NAV simply reflects the weighted average value of the securities held by the fund. So, what’s important here is not the demand of the mutual fund units but the strategic decisions that the fund manager of the portfolio takes. It’s up to the fund manager to decide when to buy and sell the underlying securities to make the most of the ups and downs in their price.  

Is NAV an indicator of performance?

The answer is no. The net asset value in mutual funds is not an accurate indicator of its performance or returns. It only impacts the number of units you will receive of a mutual fund. So, if you opt for a scheme with a higher NAV, you will receive fewer units but the value of your investment will not be impacted.

For instance, consider two mutual fund schemes of the same type, say mid-cap equity funds, one with an NAV of Rs. 100, the other with an NAV of Rs. 200. If you invest Rs. 10,000 in each, you will receive 100 units in the first scheme and 50 units in the second scheme. Since both the schemes are similar in terms of the securities they have invested in, the NAV of each goes up by 10% because their underlying securities are performing well.

This would mean that the mutual fund NAV of the first scheme is now Rs. 110 and that of the second scheme is Rs. 220. The value of your schemes would come up to be the same: Rs 110 x 100 units = Rs 11,000 and Rs 220 x 50 units = Rs. 11,000.

So, when deciding whether to invest in a specific mutual fund or when comparing two mutual funds, you should not opt for one only basis the mutual fund NAV. Instead, you should look at performance metrics such as the returns.

Key takeaways

Now that you know what is NAV in mutual funds, you will not be misled into thinking that a lower NAV means an affordable fund or that a high NAV means your returns will also be high. Net asset value in mutual funds is important to know because you should be aware of the number of units you hold in a mutual fund scheme. But to gauge the performance of a fund and to compare funds, you should look at their returns over the years and key ratios, performance compared to its benchmark index, asset allocation, fund manager and the experience they bring with them, the objective of the fund, etc.  For instance, the beta ratio of a mutual fund tells you how volatile or risky the investment is when compared to its benchmark index.

If you are new to the world of investing, you can consult a financial advisor. They can guide you on these technical aspects of investing and align your portfolio of investments with your financial goals.

You can check out all mutual funds available on Cherry here.

** All articles, columns, news, market updates, opinions and such other similar materials (“hereby referred to as Content”) published on Kotak Cherry (“hereby referred to as Platform”) is for information purpose only. The views and opinions expressed in this Content published on this Platform do not constitute the views of  Kotak Investment Advisors Limited, its parent company or its subsidiaries group companies and its affiliates (“hereby referred to as Kotak Group or Kotak”). The Kotak Group makes no warranty of any kind with respect to the accuracy, reasonableness and/or completeness of the Content published on this Platform. The information contained in this Content published is sourced from external sources and internal means, which includes the information developed by outsourced content writers and in-house writers and editors of the Kotak Group for the benefit of the customers and it does not constitute any advice from the Kotak Group. Also, all such Content published on this Platform shall not be construed as legal advice from the Kotak Group. All customers should before dealing and or transacting in any of the products or taking any investment decision based on the information referred to in this Content, shall make their own investigation and seek appropriate professional advice.

Such Content published on this platform is only for knowledge and learning purpose and is informative in nature and shall not constitute an investment advice under SEBI (Investment Advisory) Regulations, 2013. The Content published shall also not be construed as a research report as per the SEBI (Research Analyst) Regulations, 2014.

Kotak Group and any of its officers, directors, personnel and employees, shall not be held responsible or liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, due to reliance on or use of any information contained herein.

No part of this Content published on this Platform may be duplicated in whole or in part in any form and or redistributed without the prior written consent of Kotak. The Content published on this Platform should not be reproduced or disseminated to anyone else without the prior written consent of Kotak.