What is NAV and How does it NAV Calculation Work?

If you are new to investing or mutual funds in general, there a lot of things for you to understand before you invest your hard earned money in any scheme. The first is having a defined financial goal. If you want to reach your financial goal, you must be competent with financial planning. Having a defined financial goal always helps as investors become more realistic towards their investment approach and might be able to choose an investment scheme which may hold the potential of getting them closer to their goal. Having a financial goal is not rocket science. When we were in school, most of us studied keeping a goal in mind that we want to stand among the top three or top five high scoring students in the class. Similarly, maintaining a realistic financial goal might help you invest in mutual funds that may have a similar investment objective.

For those who do not know, mutual funds are not just one investment product, but there are multiple mutual fund schemes which are distinguished based on certain attributes. Mutual funds are a pool of professionally managed funds where asset management companies collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy. Mutual funds are supposed to carry a diversified portfolio because these funds spread their assets across various money market instruments like debt, G-Sec, corporate bonds, etc. A diversified portfolio means mutual funds also have the potential of balancing out risk. That’s because if one sector collapse, there’s very little chance of all the sectors collapsing at the same time and that’s how the risk of facing complete losses is reduced.

When an individual invests directly in the stock market, he/she receive company shares and becomes a shareholder. When it comes to investing in mutual funds, investors receive shares in the form of units and are referred to as unitholders. These units allotted to investors depend on the money they have invested and also depending on the fund’s existing net asset value or NAV. But what exactly is NAV and how does it work? If you too are asking the same questions, you have come to the right place.

What is NAV, and how is it calculated?

Net asset value (NAV) represents the per unit/share market value of a particular mutual fund. Net asset value is the price at which an investor can buy mutual fund units from the AMC/fund house and even sell it back to the AMC/fund house. A NAV of a mutual fund it is calculated by dividing the total market value of the mutual fund’s assets, minus the fund’s existing liabilities.

The formula of NAV is as follows:

Net asset value = market value of the mutual fund scheme + other assets – the fund’s existing liabilities

(per unit share) Number of outstanding units at the end of the day

The net asset value of any given mutual fund is impossible to calculate during the market running hours since this NAV has a tendency to fluctuate every single minute, depending on the scheme’s market performance. Hence, the net asset value of the mutual fund is calculated at the end of the day, and its closing market price is taken into account.

NAV and mutual funds

Like we stated earlier, mutual funds are a pool of professionally managed funds where fund houses collect money from investors sharing a common investment interest. The capital raised is then invested in equities and other marketable securities in accordance with the fund’s investment objective. As a mutual fund investor, you receive a certain number of shares in the form of units in proportion to the investment amount, and you may buy/sell (redeem/withdraw) these mutual fund units on any business day and make profit/loss.

How is NAV different from equity shares?

When it comes to the price of company stocks, these tend to change almost every second during market hours. On the contrary, mutual fund holders do not trade with their units in real-time. In lieu, mutual funds receive their NAV depending on the scheme’s market performance, its assets and liabilities at the end of the day.

We hope that as a mutual fund investor, you now have a fair idea about what is mutual fund NAV and how it is calculated. But there are some other characteristics that you need to bear in mind as well while choosing a mutual fund for investment. These include checking the past performance of the fund, checking whether the mutual fund is performing better than its peers, whether the mutual fund has managed to outperform its benchmark, etc.

Remember that it is better to do adequate research and look for a scheme that shares a similar investment purpose like yours. There are numerous mutual fund schemes offered a large number of fund houses, and if you are a new investor, it is better to seek the help of a professional financial advisor.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.