What is NAV?

In the previous article, we talked about what is dollar-cost averaging. In this article, we will try to understand what is NAV and some important points related to NAV  

What is NAV?

The full form of NAV is Net Asset Value. This term refers to the price of a unit of a mutual fund. To give context, mutual funds are schemes that collect money from investors and invest the money into varied asset classes, from debt to equity.  

Mutual funds are broken down into units that are when you purchase a mutual fund, you receive units of it. NAV represents the assets held by the mutual fund.  

According to the SEC (Securities and exchange commission), mutual funds and unit investment trusts (UITs) should calculate the respective NAV once a day. 

How is NAV calculated? 

Net Asset Value = Value of assets – Value of liabilities, where ‘value of assets’ represents the value of securities in the mutual funds’ portfolio, and ‘value of liabilities is the value of all the expenses and liabilities incurred by the fund. 

On a per-unit basis, the formula is  

NAV = ( Value of assets – Value of liabilities ) / Total number of outstanding units. 

Is NAV important?  

The answer is No! NAV is fairly irrelevant in cases of mutual funds – new mutual funds have a lower NAV than old ones.  

Before buying mutual funds, you should consider the size of the AUM (Assets under management), the past performance of the fund, the managers’ experience, and the alpha, and the beta.

Invest in funds with lower NAV: A common myth about NAV 

Let’s take an example. Suppose you invest INR 10,000 in two schemes (A & B). The Nav of scheme A is INR 50. while the Nav of scheme B is INR 100.

For your investment in scheme A, you will get 200 units(10000/50). And, for your investment in scheme B, you’ll get 100 units.

Now, after 1 year, both the schemes generate a return of 20%. This implies that the NAV of schemes has also appreciated by 20%. So now the NAV of scheme A will be INR 60 (20% * 50 + 50). Similarly, the NAA of scheme B will spur to INR 120(20% * 100 + 100).

The final investment value in scheme A is INR 12000(200 units * 60) and in scheme B also it stands at INR 12000(100 *120).

Thus, a fund with a lower NAV doesn’t signify that it’s a good investment or an underpriced one. Same for investors who think that funds with higher NAV are good investments.  

 What matters is the performance of the scheme and not the NAV. 

When is NAV updated?  

Unlike stock prices, NAV is not updated on a real-time basis – the reason for this is that a mutual fund has many assets in its kitty, and tracking all of them is a complicated task.

Hence, SEBI mandates the mutual funds to update the NAV every day by 9 p.m. (different mutual funds update their NAV at different times before 9 p.m.). 

Which NAV value is taken while buying and selling a mutual fund?  

If a mutual fund unit’s purchase happens before 3 p.m., the investor will receive the units at the NAV of the same day at 9 p.m., whereas purchases made after 3 p.m. are calculable at the next day’s NAV.  

The ruling remains intact even when the mutual fund units’ selling happens. Transactions before 3 p.m. are settled on the same-day NAV, and transactions post 3 p.m. are carried out on the next day’s NAV. 

 In case of purchase/sale done on holiday, the order is carried out at the NAV of the next working day.  

How do stock markets affect the NAV of a mutual fund?  

Different mutual funds hold different types of assets; they have different levels of exposure to equity and debt markets. The relevance of the exposure to the stock markets will determine how much the SENSEX and NIFTY will affect the NAV of a mutual fund. 

If a mutual fund has invested in companies that are part of SENSEX, NIFTY, or both, it is more likely to imitate their movements.

Also, multi-cap mutual funds invest in companies of various sizes, so they may or may not be affected by SENSEX or NIFTY depending upon the number of large-cap investments they have.  

NAV vs. Stock price Are they the same? 

The answer is NO! As we saw above, NAV is not affected by demand, but stock price movements do depend on demand and supply.  

Instead of calling NAV and stock price the same, we can say they’re similar – the reason being that NAV reflects the book value of the mutual fund, and stock prices, do the same for companies; the book value for companies would include assets of the company and the profits it made.  

However, another vital metric behind stock price is demand – if many people want the stock, its price may shoot up (the stock becomes over-valued), and the reverse may happen (the stock becomes under-valued). 

How do AUM and NAV differ? 

NAV and AUM are two different things. Unlike NAV, AUM is of prime importance, and it should be factored into consideration before purchasing a mutual fund.  

AUM (Assets under management) is the total value of assets that the mutual fund manages; it includes both the assets held and the cash possessed by the fund.  

How does NAV fluctuate? 

NAV can fluctuate with the change in the value of assets held by the mutual fund. Since mutual funds have varied investment instruments, the value of the holding will change depending upon the change in prices of the instruments. 

So, if the value of the assets held by a mutual fund is lower than the previous day, the NAV will also be lower and vice versa. 

Some key takeaways  

• The Net Asset Value is a fund’s assets minus liabilities and expenses.  

• It represents (on a per-share basis) the price the investors can transact in the mutual fund units.  

• The NAV moves in the same direction as the value of securities the mutual fund holds.  

• The NAV itself offers no justification for a fund being “good” or “bad” to invest in.  

• A fund’s mutual fund units may trade at levels different from the NAV. 

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