What is NAV in Mutual Funds?

NAV full form is Net Asset Value. NAV in mutual funds is the market value per share of a specific mutual fund. It tells about the value of an investment that an investor has made. Now let's understand what is NAV in Mutual Funds simply and easily. In this blog, we also cover NAV’s role in mutual funds.

Understanding Net Asset Value

Net Asset Value (nav) means subtracting the total liabilities of a company from the total assets of the company, dividing by the number of units outstanding. But the assets and liabilities of a company can change therefore the NAV value also changes. If the NAV value is higher of a mutual fund than the market price then it simply means that the mutual fund is in demand.

The common use case of NAV is open-end funds. At the end of every day, the NAV value is shown on the mutual fund website. Open-end funds are easy to enter and exit. Because there is no lock-in period in open-end funds. In the beginning, the cost of the mutual fund starts from Rs10 and it increases as the mutual fund grows.

How do Mutual Funds Work?

Now let's quickly understand how mutual funds work. So mutual funds take money from a large pool of investors. Anyone who invests in mutual funds owns a share of the fund. People generally think that they are getting shares of the company which is not true. But the share is of the fund, not the company. In the stock market shares get issued but in mutual funds, units are issued.

Net Asset Value Formula

The calculation of net asset value is simple: just collect the total assets of a company and the total liabilities. The formula for Net Asset value is :

NAV = (Total Assets - Total Liabilities) / Number of Shares Outstanding

The above formula makes the calculation of NAV easy. The only thing to make sure of is to enter the correct value of total assets and total liabilities.

Asset

In mutual funds, asset means the total market value. The total market value includes investment funds, stocks, bonds, cash and other larger sources of income.

Liabilities

Liabilities mean the debts and charges mutual funds undergo to finance their operations. The operations include: money given to lenders, non-residential or foreigners. Also other expenses like management fees, salaries, bills etc.

NAV Example

Let's take a simple example of a mutual fund scheme. In the mutual fund, the value of the assets is Rs. 100 crore and the liabilities are Rs. 50 crore and the number of outstanding shares is 5 crores.

Now using the net asset value formula i.e

Net Asset Value = (Total Assets - Total Liabilities) / Total Outstanding Shares

Therefore NAV = (Rs. 100 crore - Rs. 50 crore)/ 5 crore

NAV = Rs .10 per share

Points To Remember

1. NAV is Net Asset Value, it's different from the actual value of a mutual fund.

2. The calculation involves subtracting total liabilities from total assets and then dividing by shares outstanding.

3. NAV value shows how valuable the mutual fund is.

4. The net asset value of a company is shown at the end of each trading day.

5. It allows the investor to pick up good funds when the NAV is higher than the market value of the fund.

Role of NAV in Mutual Funds

Net asset value(NAV)  in mutual funds means understanding the mutual fund in a detailed manner. In mutual funds, it's necessary to know what is NAV. Because of the following reasons :

1. Buying and Selling: Selling and Purchasing of mutual funds happen usually at the NAV price.

2. Analyzing Performance: NAV value changes at the end of every trading day. So it helps the investor in analysing mutual funds performance.

3. Valuation: In valuation, investors know about the current value of an investment fund.

4. Quick Comparison: With net asset value investors can easily compare the mutual funds.

5. Transparency: NAV value is updated daily. And it helps the investors in making strategic financial decisions.

Net Asset Value in SIP

SIP means Systematic Investment Plan. In SIP a fixed amount is invested in mutual funds at regular intervals. Here net asset value accounts for the successive contributions. The reason is simple in SIP(systematic investment plan) the contributions are made at systematic intervals. Also, the investment amount is static.

Net asset value can help the investors in rupee cost averaging. In short, the rupee cost averaging is RCA. It's an investment strategy where regular investments are made at regular intervals. Usually, this strategy works very well when prices are low. Because when the price is low investors can easily buy more units. Generally, RCA(rupee cost averaging) works fine when an investor wants to invest for a long time.

Also, Check - SIP Calculator

Conclusion

On a day-to-day basis, investors have to make certain financial decisions. Here the net asset value helps the investors in decision making. It helps the investors in deciding which investment to pick. Also where to withdraw the funds. Normally investors benefit from the NAV when its value is higher than the market value.

In general, NAV just gives the idea about the mutual fund’s growth. But if you really wanna make good returns then you have to consider other factors which are more important than NAV. Therefore this is all about "What is NAV in Mutual Funds?"