How to Calculate NAV of Mutual Fund? How is the NAV Relevant for Investors and Factors Affecting

The Net Asset Value, or NAV, depicts the market value of mutual funds. It represents the per-unit value of a fund. Investors use this metric to determine the worth of their mutual fund investments.

Before you decide to diversify your portfolio with mutual funds, you need to ascertain a few things, like how NAV works and how to calculate NAV in mutual funds. Additionally, in this article, we will explore the relationship between NAV and mutual funds.

What is NAV in Mutual Funds?

Before we find the answer for, “how to calculate NAV of mutual fund with example,” let us first determine the NAV meaning in mutual funds.

NAV or Net Asset Value denotes a mutual fund’s market value for every single unit. It is the fund’s current market value per share. Investors get to know about the performance of the investment with this number. They can determine the rise or decline in the fund’s value over time by calculating the percentage change in its NAV.

Typically, it is calculated either by the mutual fund house itself or by a fund accounting firm appointed by the mutual fund for this purpose. As per SEBI regulations, all mutual funds are required to transparently disclose their NAV by updating it on the AMC and AMFI (Association of Mutual Funds in India) websites during the business days.

What is the Net Asset Value or NAV formula?

Now, you would be clear about “what is NAV in a mutual fund?”. We will now check the formula of NAV in mutual funds.

NAV = (Total Assets – Total Liabilities) / Total Units

In this formula, Assets are the market value of investments + accrued income + receivables + other assets. Liabilities are accrued expenses + other liabilities and payables.

Referring to this NAV calculation example, let’s say a mutual fund holds investments worth Rs. 150 crore in securities and Rs. 20 crore in cash, bringing the total assets to Rs. 170 crore.

The fund has liabilities amounting to Rs. 10 crore, which include management fees, operating fees and other payable charges.

With 15 crore units outstanding, you can calculate NAV mutual fund example as follows:

NAV = (Rs. 170 crore – Rs. 10 crore) / Rs. 15 crore = Rs. 10.67 per unit.

How do I calculate the NAV of a mutual fund?

To identify how to calculate net asset value in mutual funds, first add up the current market value of all securities in the fund’s portfolio.

Include cash, shares, bonds, and money market instruments at their latest traded prices. Subtract all liabilities like management fees, operating expenses, and outstanding payments.

Simply divide this net asset value by the total number of units outstanding to get the per-unit NAV.

Fund houses are required to update the NAV on its website daily, as per SEBI regulations. NAV details can also be found on the AMC and AMFI websites.

When is NAV Calculated?

The mutual fund NAV calculation is done at the end of each trading day once the stock markets are closed. However, the NAV that investors obtain on buying or selling the units of mutual funds relies on the fund’s cut-off time.

The cut-off time refers to the deadline by which an investor’s application to purchase or redemption of mutual fund units must be submitted to qualify for the NAV of that day.

For equity and debt funds, the cut-off time is 3 pm, while for liquid and overnight funds, it is 1.30 pm. Investment requests submitted before the cut-off time are given the same day’s NAV. However, requests made after the cut-off time are given the next business day’s NAV.

The Relationship Between NAV & Mutual Funds

NAV and mutual funds go hand-in-hand. For the determination of the mutual fund’s performance, NAV proves a useful indicator. However, it is worth noting that it is not the only one.

It is critical that you, as an investor, take into consideration other factors, too. These are the fund’s objective, portfolio composition, strategy, expense ratio, risk-return profile and past returns.

NAV, on its own, cannot provide insights into a fund’s performance over time or how it compares to other funds in a similar category. You must gain insights into returns generated by the fund over varying time periods, including since inception, one year, three years or five years.

Factors Affecting NAV Calculation

Now that we know how to calculate NAV in mutual funds, let us move ahead. We will look at some factors that affect this metric.

1- Market Value of Assets

The market value of assets comes in handy in identifying a mutual fund’s NAV. It displays the current worth of all investments held by the funds. These include stocks and bonds. When asset values increase, it directly raises the NAV. The decrease in asset value brings it down.

2- Expense Ratio

The expense ratio represents the annual fees charged by fund houses to manage the investment. Higher expenses reduce the overall returns to investors, which, in turn, brings down the NAV. Generally, a lower expense ratio is preferred as it lets more of the fund’s earnings be distributed to the investors.

3- Capital Gains and Dividends

These components of the fund also decrease its NAV as they bring down the total assets of the fund. They affect its per-share value.

4- Sales Costs

The fund house will apply some charges when investors buy mutual fund units. These are known as sales costs or sales loads. They decrease the amount that can be invested in the fund. Hence, these charges can impact NAV quite a lot.

5- Fund Inflows and Outflow

Fund inflows denote fresh investments into a mutual fund. This increases its total assets and is likely to raise the NAV value. Conversely, outflows happen when investors redeem some or all units of their fund holding. This will lower the NAV as a result. Fund houses strive to maintain healthy performance by seeking a balance between the outflows and inflows.

How is the NAV Relevant for Investors

Investors can have more information on the performance of the fund through NAV. Let us now find out why investors should monitor the NAV of a fund.

1 – Reflects growth in wealth

NAV is a critical indicator of how the investment grows over time. For example, let us take the case of a fund’s NAV that goes up from Rs. 150 to Rs. 180 in one year. To assess your regular investment plans, try the SIP Calculator for detailed projections.

This would mean that there has been a 20% ROI. The metric helps investors monitor how their portfolios are performing. It further helps them in deciding what to do with the investment by looking at the trends.

2- Allows Comparison

This metric on its own will not directly lead to a method of comparison; however, you can use the same to examine returns among numerous funds.

If you know how to calculate average NAV in mutual fund, you can track the performance comparison of two or more funds in either the same group (like two different equity funds) or different categories (debt vs. equity funds). For better return estimation across funds, use the Mutual Funds Return Calculator.

Such comparative analysis is useful in optimising their investment choices.

3- Correctly Shows Fund Performance

NAV is an analysis tool for fund managers and investors alike. It gives them daily insights into the fund’s performance. When investors know how to calculate NAV, they can use the daily updates and get to know how well their investments are doing.

Such recent information keeps them posted on the effectiveness of fund management and how it is likely to perform in the future.

For systematic planning of your investments, you can use the HDFC SIP Calculator to estimate returns over time.

Conclusion

NAV is a critical metric that helps you understand and track a mutual fund’s performance and value. We hope that this blog equipped you with transparency on how to calculate NAV in mutual funds with examples. However, again, relying only on NAV is not enough. It is critical that you use NAV, among other tools of analysis and research, to line up your investment with your financial goals.