What is NAV in Mutual Funds?

Ever seen a mutual fund with an NAV of ₹10 and thought, “Looks cheap, must be a good buy”?
Not really. NAV (Net Asset Value) is simply the price of one unit of a mutual fund, like the price tag on a product. But don’t be fooled: a low NAV doesn’t mean the fund is better or cheaper in value. In this blog, we’ll explain what is NAV in Mutual Funds.

What is NAV?

NAV stands for Net Asset Value. It’s the price of one unit of a mutual fund. Think of it like checking the price per kg when you buy rice. In mutual funds, you're buying units, and NAV tells you the cost of one unit. So, if a mutual fund's NAV is ₹20, it means one unit costs ₹20.

For example, you invest ₹2,000 in a fund with an NAV of ₹20.
Units you get = ₹2,000 ÷ ₹20 = 100 units
That’s all NAV is, the per-unit price of a mutual fund.

How do Mutual Funds Work?

Mutual funds work by collecting money from many investors and putting that money into a pool. This pooled money is then invested in things like stocks, bonds, or other assets. When you invest in a mutual fund, you don’t get shares of a company; you get units of the fund. That’s an important difference.

In the stock market, you buy shares of individual companies.
In mutual funds, you buy units of the fund, which is a mix of many companies or assets.

So you're not owning a single company, you're owning a piece of a big basket that holds many different investments. This makes mutual funds a simple way to diversify your money without having to pick stocks yourself.

Net Asset Value (NAV) Formula

The formula to calculate NAV is straightforward:

NAV = (Total Assets – Total Liabilities) ÷ Total Units Outstanding

This tells you the value of one unit of the mutual fund. To get it right, you just need two things:

The total assets the fund owns
The total liabilities or expenses the fund owes

What Are Assets?

In mutual funds, assets refer to the total market value of investments, such as:

Stocks
Bonds
Cash
Other income-generating investments

It’s the full value of everything the fund owns.

What Are Liabilities?

Liabilities are the fund’s expenses and debts. These include:

Management fees
Staff salaries
Administrative costs
Any money the fund owes to others

So, before calculating NAV, the fund subtracts all its liabilities from its assets.

NAV Example

Let’s understand NAV with an example:

Total Assets = ₹100 crore
Total Liabilities = ₹50 crore
Total Units Outstanding = 5 crore units

Apply the NAV Formula: NAV = (Total Assets – Total Liabilities) ÷ Total Units

NAV = (₹100 crore – ₹50 crore) ÷ 5 crore units
= ₹50 crore ÷ 5 crore units
= ₹10 per unit

So, the price of one unit of this mutual fund is ₹10. That’s the NAV.

Role of NAV in Mutual Funds

Understanding NAV (Net Asset Value) is important for every mutual fund investor. Here’s why NAV matters:

Buying and Selling: Mutual fund units are bought and sold based on the NAV price. So your buying or redemption is directly linked to the NAV.
Analyzing Performance: Since NAV changes daily, it helps investors track how their investment is performing over time.
Valuation: In valuation, NAV helps you check the latest value of your investment in the fund.
Quick Comparison: You can compare different mutual funds by looking at their NAV trends and returns, not just the NAV number.
Transparency: NAV is updated every business day, so investors always have clear and current information to make smart decisions.

Net Asset Value in SIP

SIP (Systematic Investment Plan) means investing a fixed amount regularly, like every month, into a mutual fund. In SIPs, the NAV (Net Asset Value) determines how many units you get for your money each time you invest. Here's how it works:

When NAV is low, you get more units
When NAV is high, you get fewer units

This balancing effect is called Rupee Cost Averaging (RCA).

Also, Check - SIP Calculator

Points To Remember About NAV

NAV stands for Net Asset Value: it represents the price per unit of a mutual fund, not the total value of the fund.
NAV is calculated as: (Total Assets - Total Liabilities) ÷ Total Units Outstanding
NAV helps you understand the fund’s current value: It shows how much one unit of the fund is worth.
NAV is updated daily: It’s calculated at the end of each trading day after the market closes.
A higher NAV doesn’t mean the fund is expensive or better: Always look at overall returns, not just the NAV.

Conclusion

In conclusion, NAV helps you understand the current price of a mutual fund unit. It’s useful to see how your investment is doing. But don’t blindly chase low NAV funds. That’s like picking the cheapest t-shirt and expecting it to last forever. So, focus on fund returns, consistency, fund manager, or where it invests (large cap, mid cap, debt, etc.) Imagine NAV like a meter; it shows the price, but not the full picture. Use it wisely, but don’t base all your decisions on it.