Important things to know about NAV

Mutual Fund

When planning for a mutual fund investment, you should obviously keep an eye on the past performance of a particular mutual fund scheme. This is indicated by NAV.

NAV is Net Asset Value. The market value of the securities which is held by any particular scheme is represented by NAV.

As you know, mutual fund pools money from investors like us and then invests them in different investment instruments like- government securities, bonds, stocks etc. It’s not that, all the money is invested altogether as because the stock value changes very frequently.

So, NAV is the total market value of all the assets(bonds, stocks, securities etc) in a portfolio and the cash (which is not invested) divided by the total number of fund units in existence.

NAV reflects the value of a mutual fund scheme’s assets deducting all the liabilities’ value per unit.

How does NAV Changes?

The NAV goes up when the price of the securities(majority) held by any particular scheme rises. And the NAV falls if the price of the securities(majority) held by any particular scheme goes down. So, its pretty much clear that the NAV changes as per the change in the price of the securities that are held by the mutual fund scheme.

At the NAV price, you as an investor buy mutual fund units from a fund company at the time of investment. Also, you can sell the fund units on NAV, but the selling price will be lower than the NAV in case of an exit load. Exit Load is an amount that is charged for exiting the fund or the fund house as an investor. Exit load is charged as a % of NAV.

How can you calculate NAV?

Let’s explain the NAV calculation using an example.

Let us assume the market value of all the shares in a portfolio of a mutual fund is Rs. 6000 crores. The current units of that fund is 300. 

So, NAV= 6000/300 = Rs. 20

When is NAV calculated?

The price of underlying stocks changes every moment so, it’s really not possible to calculate NAV during the market hours.

Considering the closing market prices of the securities that a particular fund holds, generally, NAV is calculated at the end of each market day.

If you place an order to buy or sell any mutual fund units on a holiday, then the NAV will be calculated at the end of the next working day.

If you place an order to buy or sell fund units on a working day before 3 pm, then the NAV will be calculated at the end of the very day. So, you will get units on the basis of that NAV value.

Again if you place the order on a working day after 3 pm, then you will get units on the NAV value at the end of the next day.

On all working days, a mutual fund company declares its latest NAV.

High NAV Vs Low NAV

To understand what is high and low NAV, let us take a hypothetical example.

Let’s consider that you invest in two schemes A and B. The Scheme A has NAV of Rs. 20 and Scheme B has NAV of Rs. 40. You made an equal investment of Rs. 2 lakh each in both schemes A and B. For Scheme A, you get 10,000 units and for Scheme B, you get 5000 units. Very evidently, Scheme A is cheaper than B. Hypothetically, consider that both the schemes give 12% return in a month. So, now the NAV of scheme A is Rs. 11.2 and NAV of scheme B are Rs. 22.4 and the value of your investment are Rs. 1,12,000 for both the schemes.

So, its quite clear that for generating returns, the NAV of a scheme is not so relevant. Only the number of units that you will get will be higher for scheme A compared to scheme B.

In short, two schemes having an identical portfolio keeping other things constant and giving the same returns, the NAV difference will merely matter.

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