What is a Mutual Fund product’s NAV? How is it calculated?

NAV or Net Asset Value is a term that you will see on various mutual fund promotional materials. So what exactly is it?

Simply put, NAV is the price of each mutual fund unit at which an investor can buy and sell units of the fund. NAV of a fund changes every day as a result of changes in the market price of the securities that form a part of the portfolio. Think of it as the collective singular price of a combination of many different shares and securities held in a mutual fund product.

Let’s understand NAV with an example. Let’s say you invested in a balanced mutual fund portfolio which includes equity stocks, government bonds, corporate bonds and short term debt. The closing value of these underlying securities are Rs 54, 800 (equity stocks), Rs 23, 960 (government bonds), Rs 71,100 (corporate bonds) and Rs 41,240 (short term debt). NAVs are calculated by taking the closing value of all securities that the product portfolio holds i.e Rs 1,91, 100. From this total value, the liabilities and expenses that the product incurs are reduced i.e. 1,91,100 minus 5000 equals to Rs 1,86,100. The resultant value is then divided by the number of units of that Mutual Fund product. This gives us the NAV of one unit of the product i.e. Rs 1,86,100 divided by 5000 equals to Rs 37.22.

The Securities and Exchange Board of India (SEBI) which is the capital markets (including mutual funds) regulator, has stipulated the following formula for NAV:

So, if you were looking to invest Rs 5000 in a mutual fund product with an NAV of Rs 20, you will end up buying 250 units of that product.

All fund houses are required to disclose the NAV of all the Mutual Fund products on their website and also on the website of the Association of Mutual Funds in India, or AMFI, daily.

NAV and fund performance

Should you invest in a mutual fund A with a NAV of Rs 10 or in mutual fund B with a NAV of Rs 100? This is a classic mistake many mutual fund investors tend to make - to consider an NFO as a cheap opportunity to buy into a mutual fund, because the NAV is generally a small amount to begin with for a newly launched product.

The answer to the question posed above is that a higher or lower NAV is not a factor that should influence your investment decision. It does not indicate a higher or lower potential return; it is simply a fund pricing mechanism. By itself, a fund’s NAV means nothing, which means that comparing NAVs of two different funds with different objectives is meaningless. While the actual NAV is not an indicator of the performance of the fund, if the NAV loses value over time, it is worth checking the performance of the fund vis-à-vis the category average (average returns of all funds in the category this fund belongs to) and benchmark index; this will give a better indication of the fund’s performance.

However, if there are two funds from two different fund houses launched at a similar time and at the same NAV - let’s say both Fund C and Fund D were launched 5 years ago at an NAV Rs 10 each, and both had similar objectives and invested in similar types of securities, then the current NAV will definitely be an indicator of how Fund C is doing compared to Fund D. The golden rule being- when it comes to fund performance, compare apples to apples, and not apples to oranges.

The next time you hear about Mutual Funds and their NAVs remember not to judge the book by its cover.