Understanding NAV and its role in index funds and ETFs

Think of Net Asset Value (NAV) as the price tag of a mutual fund. Just like a stock has a share price, mutual funds have an NAV that represents their per-unit value.

For beginners, NAV can be confusing. Some investors mistakenly believe that a lower NAV means a cheaper or better investment, but that's not how it works. NAV is simply a pricing mechanism - it doesn't determine whether a fund is good or bad.

In this article, we'll break down what NAV means, how it's calculated, and why it matters when investing in index funds and ETFs.

What is Net Asset Value (NAV)?

NAV is the per-unit price of a mutual fund, calculated at the end of each trading day. It represents the fund's total assets minus liabilities, divided by the total number of units held by investors.

Unlike stock prices, which fluctuate constantly during market hours, mutual fund NAV is updated only once a day, after market closing.

Suggested read: Low NAV doesn't mean cheaper fund

How is NAV calculated?

NAV is determined using the following formula:

NAV = (Total assets - Total liabilities) / Total units outstanding

where:

• Total assets = The market value of all stocks, bonds, and securities held by the fund.
  
• Total liabilities = Fund expenses, management fees, and operational costs.
  
• Total units outstanding = The total number of units held by investors.

Example: Suppose an index fund holds stocks worth Rs 1,000 crore, has liabilities of Rs 10 crore, and has 100 crore units outstanding.

NAV = (1,000 - 10) / 100
NAV = 990 / 100
NAV = Rs 9.90

This means if you buy or sell this index fund today, you'll do so at Rs 9.90 per unit.

NAV in index funds vs ETFs

NAV in index mutual funds

• Mutual funds allow buying and selling only at the end-of-day NAV.
  
• NAV is not an indicator of whether a fund is performing well or poorly - what matters is how well the index fund tracks its benchmark.

NAV in ETFs

• ETFs, unlike index funds, are traded like stocks on exchanges, so their price fluctuates throughout the day.
  
• ETFs have two NAVs:
  
• Indicative NAV (iNAV): Real-time NAV that changes during market hours.
  
• End-of-day NAV: The final NAV published after market close.
• Since ETFs trade based on supply and demand, they can sometimes trade at a premium or discount to their NAV.

NAV plays a different role in ETFs, as their prices fluctuate like stocks. You should check both iNAV and market price before buying an ETF.

Why NAV matters for investors

Understanding NAV helps investors in several ways:

• Tracking fund performance: NAV movements over time indicate how the fund is performing relative to its benchmark.
  
• Ensuring fair pricing: In mutual funds, all investors get the same NAV price at day's end, ensuring fairness.
  
• Avoiding overpaying in ETFs: Knowing NAV prevents buying ETFs at a premium.
  
• Comparing funds correctly: Instead of looking at NAV alone, investors should focus on expense ratios, tracking error, and long-term returns.

Common misconceptions about NAV

• Lower NAV means a better investment: A fund with Rs 10 NAV is not cheaper or better than a fund with Rs 100 NAV. Both will grow at the same rate if they track the same index.
  
• Buying at a lower NAV gives higher returns: NAV only affects unit pricing, not returns. Whether you buy an index fund at Rs 10 NAV or Rs 100 NAV, your returns depend on the index's growth, not the initial NAV.
  
• NAV is like a stock price: Unlike stocks, NAV does not indicate future growth. It simply reflects the fund's current market value per unit.

The right way to evaluate index funds

Instead of focusing on NAV, investors should look at:

• Expense ratio: Lower fees mean better returns.
  
• Tracking error: A low tracking error means the fund mirrors the index more accurately.

Conclusion

NAV is simply a pricing metric - it doesn't determine a fund's quality or growth potential. Instead of fixating on NAV, investors should focus on factors that truly impact long-term wealth creation, such as index selection, expense ratios, and tracking accuracy.

An investor education and awareness initiative of Nippon India Mutual Fund.

Helpful Information for Mutual Fund Investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in For more info on KYC, change in various details and redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Also read:
Index funds for beginners: A step-by-step guide
Active vs passive investing: Which is right for you?

This article was originally published on March 10, 2025.