What is NAV in Mutual Funds and How is it Calculated?

In a mutual fund investment, the Net Asset Value (NAV) plays an important role. Before you make an investment, it is important to understand what an NAV is, and how it has an impact on your portfolio.

An NAV is the present value of one unit of a mutual fund. Any purchase or sale transaction that you make in the fund will be conducted at the prices that are connected to the NAV of the chosen fund. When you estimate the aggregate assets in a mutual fund scheme, it will be the total of the present market value of all the securities, which form a part of the portfolio. Total assets will also include cash, as well as, accrued income. Out of this total amount, the current liabilities, as well as, expenses, which are incurred in handling a portfolio, will be deducted in order to determine net assets. Thus, the amount derived in net assets will then be divided by the aggregate number of units held in the scheme in order to derive the mutual funds NAV. This NAV changes every day and it will be calculated on each business day. This means that the NAV could rise or decline based on the value change in the securities held in a scheme.

The impact of high and low NAV

Before you invest in a mutual fund, it is important to understand the difference between a high and low NAV. Many distributors promote new funds by offering a low NAV. Due to this; the investors believe that they are getting a good deal. This is because investors equate the NAV of a mutual fund with the price of the company’s stock and doing this is a wrong practice. In the case of stocks, a low price means it is available at a bargain price but this is not applicable to an NAV in mutual funds. One cannot judge the mutual fund as cheap or expensive by considering the NAV. An NAV will only tell you the current price of one unit of the scheme and a high NAV might reflect the positive performance of the scheme. If a scheme has been around for a long time, the NAV will be high. NAV does not say anything about the performance of the scheme or the returns. It only affects the number of units you receive. If you invest in a fund with a high NAV, you will get fewer units and the value of your investment will remain the same. The amount of investment you make does not change, only the number of units you receive vary.

The NAV is a mutual fund’s book value. In order to shortlist a mutual fund, you need to analyze its performance and not the NAV. Make use of the mutual fund calculator to estimate the amount of investment you need to make in a fund in order to achieve your long-term financial goals.