What is NAV in Mutual Funds?

NAV Meaning

NAV stands for Net Asset Value. It shows the per-unit price of a mutual fund scheme. Investors buy and redeem mutual fund units at the applicable NAV, which is determined by cut-off times and fund rules. Applicable exit loads or statutory charges may reduce final redemption proceeds.

Since asset values fluctuate daily, NAV also reflects these changes. Unlike stock prices, which move throughout the trading day, the NAV in mutual funds is declared only once after market hours, as mandated by SEBI (Securities and Exchange Board of India). 

These values are updated on AMC websites and the AMFI portal. Except for Liquid and Overnight funds, units are allotted at the day’s closing NAV, while applications submitted after the cut-off are processed at the next business day’s NAV.

Why NAV Matters in Mutual Funds?

NAV reflects a fund’s value, helping investors make informed and fair decisions. Key reasons include:

• Transparency: The NAV in mutual funds is calculated using a standardised methodology prescribed by SEBI, ensuring uniform treatment across all fund houses and enabling fair comparisons.

• Daily Disclosure Compliance: Mutual funds must disclose NAV daily in line with SEBI rules, ensuring accountability and accuracy in valuation for investors.

• Risk Management: Standardised NAV calculation prevents overvaluation or undervaluation, as all units are bought directly from AMCs, not traded in fluctuating secondary markets.

• Performance Benchmarking: NAV enables a clear comparison of mutual fund performance, helping investors analyse growth percentages and make efficient investment decisions.

How is the Applicability of NAV in Mutual Funds Determined?

As per SEBI guidelines, effective February 1, 2021, the applicable NAV depends on both fund realisation in the mutual fund’s bank account and the prescribed cut-off timings, irrespective of the investment amount.

From 1 February 2021, the NAV applies only when funds are credited to the mutual fund’s bank account before the cut-off time for all schemes and amounts. The table below explains the rules for both Liquid/Overnight Funds and all other schemes:

How is NAV Calculated?

NAV is calculated by subtracting liabilities from the total market value of assets and dividing by the number of outstanding units.

The formula for calculating NAV is:

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

Where:

• Total Assets: Includes the market value of mutual fund schemes' securities, cash, and accrued income.

• Liabilities: Covers management fees, operating expenses, and other obligations to be paid by the scheme.

• Outstanding Units: Represents the total number of units currently held by all investors in the scheme.

Example of NAV Calculation

Suppose a mutual fund has assets worth ₹200 lakh and liabilities of ₹50 lakh, with 10 lakh units issued.

NAV per unit = (₹200 lakh – ₹50 lakh) ÷ 10 lakh = ₹15.

This means each unit is valued at ₹15. NAV rises when the fund’s investments gain value and falls when asset values drop or expenses increase.

• Lump Sum Investment: If you invest ₹15,00,000 before the 3:00 p.m. cut-off on a business day and the funds reach the AMC’s bank account on time, you’ll get that day’s NAV. If funds arrive after 3:00 p.m., the next business day’s NAV applies. For example, money credited on Friday evening after cut-off will result in allotment at Monday’s NAV (if Saturday and Sunday are non-business days).

• Ensuring Timely NAV Allotment: Electronic transfers help ensure the investment amount is realised by the cut-off, securing allotment at the intended day’s NAV.

• SIP Investment: For an SIP, let’s say of ₹20,000 scheduled on the 10th of each month, units are allotted at the NAV of the 10th only if the money reaches the AMC’s bank account before 3:00 p.m. that day. If the funds arrive later, the allotment happens at the NAV of the next business day. This is why electronic transfers are recommended to ensure timely credit.

Role of NAV in the Performance of a Fund

Many beginners mistakenly assume that NAV reflects a fund’s overall performance. While it shows the per-unit value at a given time, it does not indicate whether a fund is a better or cheaper investment. A fund with a NAV of ₹15 can deliver the same percentage returns as one with a NAV of ₹100.

NAV simply reflects the daily value of the underlying assets and how they have performed. When evaluating a fund's performance, investors should focus on historical returns, expense ratios, fund manager expertise, and portfolio quality, rather than NAV performance.

NAV in Closed-End Funds vs Open-End Funds

While both open-end and closed-end mutual funds calculate NAV daily, the way investors buy, sell, and experience price movements differs. The table below highlights the key distinctions:

NAV and Investor Transactions

While NAV indicates the per-unit value of a fund, successful investing requires looking beyond NAV at performance, management, and strategy:

• Don’t Rely Solely on NAV: NAV indicates a fund’s per-unit value but isn’t the only measure of investment quality. Assess performance history, strategy, and management.

• Know What NAV Represents: NAV shows the current value of a fund unit, not future returns. High or low NAV alone does not determine investment success.

• Prioritise Portfolio and Management: A well-managed fund with a strong, diversified portfolio can deliver better returns, regardless of its NAV. The fund’s portfolio strategy and the manager’s decisions matter more for returns.

• Use Systematic Investment Plans (SIPs): SIPs allow regular investments, buying units at varying NAVs, which averages costs over time and reduces market timing risks.

Factors Affecting NAV in Mutual Funds

Several factors, including market movements, expenses, investor activity, and distributions, directly or indirectly affect a fund’s NAV:

• Market Movement: NAV changes daily based on the market value of the fund’s underlying securities.

• Fund Expenses: Management fees, administrative costs, and operational expenses reduce the fund’s assets, which can lower NAV over time.

• Inflows and Outflows: Investor purchases or redemptions may impact the fund’s cash position and portfolio rebalancing, indirectly affecting NAV.

• Dividends and Distributions: NAV decreases when the fund pays out dividends or capital gains, as these reduce the total assets in the fund.

Common Misconceptions About NAV in Mutual Funds

Many investors misunderstand NAV, assuming low or high values indicate better affordability or returns. Here’s what you should know:

• Low NAV Indicates a Better Buy: A lower NAV only shows per-unit value, not affordability or potential returns.

• High NAV Guarantees Higher Returns: NAV alone doesn’t determine performance; returns depend on portfolio quality, fund management, and market conditions.

• Buying More Units at Lower NAV Means Higher Returns: Returns are driven by NAV growth, not the quantity of units purchased.

• Dividends Are Higher in High NAV Funds: Dividend payouts reduce NAV proportionately, irrespective of the fund’s NAV level.

• Low NAV in NFOs Ensures High Growth: Potential growth depends on the fund’s portfolio, strategy, and risk profile, not its initial NAV.

Key Takeaways

NAV meaning in a mutual fund, is the per-unit value, calculated by subtracting liabilities from total assets and dividing by outstanding units. Calculated as (Assets – Liabilities) ÷ Outstanding Units, it determines the price for purchase and redemption. While NAV fluctuates daily due to changes in asset values, income, expenses, and liabilities, its level does not indicate performance. Investors should evaluate historical returns, fund management, and portfolio quality over NAV alone. With the right approach, you can take charge of your financial future and start SIP in best mutual funds in India.