What is mutual fund NAV?

When it comes to mutual funds, one term that often stands out to investors is NAV or Net Asset Value. Many people believe that comparing the NAV of different funds can help them identify the best investment options.

However, this approach is deeply flawed and stems from a common misunderstanding about what it truly represents. In reality, it is not an indicator of a fund's quality, performance, or potential for growth.

In this article, we'll demystify what it is and whether it is a good indicator of a mutual fund performance. Let's dive in.

Understanding NAV

At its core, mutual fund NAV stands for Net Asset Value. It represents the per-unit value of a fund at a given point in time. In simpler terms, it tells you how much one unit of a fund is worth.

The formula: Net asset value = (Assets - Liabilities) / Total mutual fund units

Let's cover what these components mean:

• Assets: These include the fund's investments in stocks, bonds, cash reserves, and accrued income.
  
• Liabilities: These are expenses such as fund management fees, operational costs, and other charges.
  
• Mutual fund units: The total number of units held by all investors in the fund.

For example, if a fund's total assets are worth Rs 1,000 crore, liabilities are Rs 100 crore, and there are 10 crore units in circulation, the net asset value would be Rs 90.

Suggested read: What is NAV in mutual funds?

How is mutual fund NAV calculated and published?

Its calculation takes place after two different cut-off times based on the fund category. Here's how it works:

1. Equity and other schemes calculate their net asset value after 3 pm. Whereas, liquid schemes start calculating after 1:30 pm.

2. Once done, all funds have to publish the results by 11 pm on the same day. With the exception of FoF or Fund of Funds.

Does a low NAV mean a fund is cheap?

One of the biggest misconceptions about mutual funds is that a lower net asset value indicates a cheaper fund. To illustrate why this is an incorrect assumption, consider the following example:

You invest Rs 5,000 in two funds:

• Fund A: Net Asset Value = Rs 50 per unit
  
• Fund B: Net Asset Value = Rs 500 per unit

Your investments will result in:

• Fund A: 100 units (Rs 5,000 divided by Rs 50)
  
• Fund B: 10 units (Rs 5,000 divided by Rs 500)

Now, let's assume both funds grow by 10 per cent:

• Fund A: Net Asset Value = Rs 55; total value = 100 units × Rs 55 = Rs 5,500
  
• Fund B: Net Asset Value = Rs 550; total value = 10 units × Rs 550 = Rs 5,500

The percentage growth and final value are identical. The difference in net asset value is irrelevant because it's the growth rate that determines your returns.

Hence, it reflects the per-unit value of the fund but says nothing about its performance or suitability as an investment. Instead, you should track returns over a period of time.

Suggested read: Low NAV doesn't mean cheaper fund

Is there a good NAV for a mutual fund?

The net asset value of a fund is simply the price per unit and does not indicate whether a fund is good or bad. A low or high net asset value is irrelevant to the fund's performance.

Instead, focus on factors like the fund's historical returns, performance against its benchmark, portfolio quality, and alignment with your financial goals. Net asset value is just a transaction value; what matters is how well the fund grows your investment over time.

What does net asset value indicate?

It serves as a snapshot of a fund's current value per unit. However, it is not an indicator of the following:

• Fund performance: While it is used to measure the growth of a fund, it doesn't necessarily indicate its performance. There are better indicators, such as alpha.
  
• Growth potential: A low or high, it doesn't predict future returns.
  
• Affordability: Since it is proportional to the number of units issued, it doesn't determine whether a fund is cheap or expensive. Also, you can buy a fraction of a unit. If a fund has a high NAV, you'll still be able to invest in it, provided you have the minimum investment amount.

For long-term investors, factors such as the fund's consistency in performance and alignment with financial goals are true indicators of a suitable fund.

Suggested read: What the NAV of a mutual fund tells you

Conclusion

For long-term investors, net asset value is just a neutral metric - a way to calculate the current value of your mutual fund holdings. It doesn't indicate the fund's affordability, performance, or growth potential. The more reliable indicators of a good investment are the fund's past performance and how well it fits your financial goals.

So, the next time you evaluate a mutual fund, don't be swayed by this metric. Instead, focus on the big picture: Does the fund's strategy align with your investment objectives? Is it managed by a competent team? And most importantly, is it consistent in delivering results over the long term?

Understanding NAV is important, but choosing the right mutual fund requires a deeper analysis. Value Research Fund Advisor simplifies your investment journey by providing personalised fund recommendations, tailored to your financial goals. With actionable insights, in-depth research, and personalised recommendations, you can optimise your investments and achieve long-term success. Start your journey with confidence today!

Also read: How mutual fund NAVs grow from Rs 10 to Rs 4,000

This article was originally published on December 13, 2024.