What is NAV in Mutual Fund? A Complete Guide for Beginners
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In the past few years, the Mutual Funds scheme has emerged as a popular choice among investors from all over the nation. Yet, the performance of mutual funds highly depends upon NAV (net asset value). It represents the value per share for a particular fund which is calculated daily by dividing funds total assets by a number of units.
In this blog, you will learn NAV full form, its importance and how NAV is calculated in mutual funds.
NAV Full Form in Mutual Funds?
The NAV full form is Net Asset Value, which is a mathematical calculation used to determine the per unit value of a mutual fund. In simple words, it represents the market value of all the assets held by the fund minus its liabilities and then divided by the total number of units. This method will help you to understand the value of mutual funds at a given time. The mutual fund NAV or net asset value is calculated after the market is closed and then published in the report.
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Moving on, let’s see how NAV is calculated using a simple process just for you.
How is NAV Calculated?
Net asset value calculation is a straightforward process answering what is NAV value formula is in simple words:
There are two types of how NAV is calculated in mutual funds:
-
Daily Net Valuation of Assets
All the Mutual fund companies calculate the total worth of their portfolio daily after the market closes. The market reopens on the next day with the closing prices of the previous day. On the next day, the fund houses accordingly deduct all the expenses to get the net valuation of the assets for the day, using the formula mentioned above.
-
General calculation of the Net value of Assets
The general NAV means is calculation under which you receive the mutual fund as per current asset value. This calculation gives the market value of a particular asset and also finds the changes as per market volatility.
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Key Importance of NAV in Mutual Funds
The Net Asset Value (NAV) is important when investing in mutual funds for these reasons:
- NAV is Calculated Every Day: It tells you the current value of the fund’s assets and it gets updated daily.
- It Changes with Market Conditions: NAV goes up or down depending on how the stocks or assets in the fund perform.
- Helps Decide Fees: The NAV is used to figure out the fees you pay for managing the fund.
- Affected by Money Coming In or Out: When investors buy or sell shares in the fund, the NAV can change.
In simple terms, the NAV helps you see how well the mutual fund is doing and its current value.
Let us see how this NAV helps you.
How Does Calculating NAV Help an Investor?
As you know this value can easily help them assess their investment at any time using the help of NAV. This value significantly helps investors make better decisions such as:
1. Understanding Investment Value
Calculating NAV can help investors determine the current value of their mutual fund, which helps them track their growth or losses over time.
2. Basis for Transaction
It is the price at which investors buy or redeem units of mutual funds. This ensures that investors are aware of the exact cost of entry or exit from the market.
3. Performance evaluation
Monitoring the changes in net asset value allows investors to check how well a portfolio is performing. A good evaluation ensures that the company has good management and portfolio performance.
4. Transparency
Regular calculations and audits of NAV provide transparency and give investors a clear view of how their money is being managed and the impact when the market is unpredictable.
After knowing about this asset value let's see how this is relevant to investors
How is NAV Relevant to Investors?
When you are investing in a fund then the NAV is just the definition, which says per unit price of buying the mutual fund. It does not mean that the scheme with a lower NAV is better than any other fund. The change in NAV can give you a sense of which direction the fund is moving towards or its past performance. However net asset value is not comparable among mutual funds. Here is a net asset value example. If Fund A has a NAV of Rs.200 and Fund B has a NAV of Rs.20, it does not mean that Fund A is better than Fund B.
Let us see how:
| Components | Fund A | Fund B |
|---|---|---|
| Current NAV | Rs.200 | Rs.20 |
| Amount invested by you | Rs.2000 | Rs.2000 |
| Number of units bought | 10 | 100 |
| 20% growth in both NAV | Rs.240 | Rs.24 |
| Value of investment | Rs.2400 (Rs.240*10 units) | Rs.2400 (Rs.24*100 units) |
Your investment value remained the same in both funds when both are growing at the same pace. But as you can see from the above example this is a myth that the high rupee value NAV is better always. You should invest in a mutual fund only if it aligns with your financial goals and risk tolerance not because its NAV is less or more.
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NAV Allotment for Different Investment Types
Some of the allotment types are:
1. One-time investments
For one-time purchases, if you are paying by cheque, you would not get allocation at the same day NAV because it will be realized on a later date. Payments through RTGS, NEFT, UPI, or any bank that allows for instantaneous credit will be credited into the account of the asset management company instantaneously.
2. SIP
For all SIP payments, the NAV will be allotted the day on which payment is realized in the AMCs collection account, irrespective of the mode of payment. This is dependent upon the banking settlement systems and automatic mandates through which most SIP installments are processed.
3. Other Options
Concerning First Time Offers, applications do not matter; the NAV of allotment will be final from the cutoff date or according to the amount of the credit day. Anything related to switching depends upon the payout cycle of the switch-out fund. That’s when the switch in fund receives the money.
Conclusion
In conclusion, NAV or net asset value is an important concept in the world of mutual funds. Calculating NAV helps investors understand their investments current worth and make informed decisions. This tool is absolutely a stunning choice for the investor to know the per-unit value of a fund at a given time. This serves as a basis for buying and selling units. Hence, this tool is the perfect choice for you to have a better sense of a fund's last performance.
FAQs
1. Why NAV is good for mutual funds?
Net asset value is good for mutual funds as a mutual fund marks high and low in a day so it does not impact its investment returns.
2. Which NAV is good High or Low?
A higher NAV is not always better because it shows the funds asset value, not its potential returns. Focus fund growth and expense ratio also.
3. What happens if NAV Increases?
Increasing NAV indicates that the fund’s assets are appreciating potentially resulting in capital gains for investors.
4. Is NAV Calculated Every Day?
Yes, it is calculated when a day ends and publishes the current value of NAV by 11:00 PM.
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