What is a mutual fund NAV?

The Net Asset Value (NAV) represents the price of each mutual fund unit, calculated by dividing the total market value of a fund's assets (after subtracting liabilities) by the number of outstanding units. It serves as a key metric to track the performance of an investment over time. However, many investors misinterpret NAV, using it as a measure of whether a fund is cheap or expensive.

A common misconception, especially among new investors, is that a fund with a lower NAV is more affordable and offers higher growth potential compared to one with a higher NAV. This belief is entirely misleading. The truth is that NAV, by itself, does not determine a fund's future returns or performance.

In this article, we'll explore the concept of NAV in detail, address the misconceptions surrounding it, and explain how investors should actually use this metric. By the end, you'll have a clearer understanding of NAV and be better equipped to make informed investment decisions.

What is NAV (net asset value)?

NAV represents the per-unit price of a mutual fund. It is calculated using the following formula:

NAV = (Total Assets - Total Liabilities) / Total Number of Units

Unlike stock prices, which are determined by market demand and supply, NAV reflects the intrinsic value of the fund's assets and liabilities. Therefore, NAV is not an indicator of a fund's future growth potential but rather a measure of its current valuation.

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

How is NAV calculated?

To understand how NAV is derived, let's look at the calculation process:

• Total assets: Add up the value of all securities (stocks, bonds, cash, etc.) in the fund.
• Subtract liabilities: Deduct expenses such as management fees, operational costs, and any outstanding obligations.
• Divide by total units outstanding: The final NAV is obtained by dividing the net assets by the total number of mutual fund units issued.

For example, if a mutual fund has assets worth Rs 1,000 crore, liabilities of Rs 50 crore, and 10 crore units outstanding, the NAV would be:

NAV = (Rs 1,000 crore - Rs 50 crore) / 10 crore = Rs 95 per unit

Suggested read: What is mutual fund NAV?

How often is NAV updated?

NAV is updated at the end of each trading day after the stock market closes. This is because mutual funds invest in various securities whose prices fluctuate throughout the day, and a daily closing price is needed to calculate an accurate NAV. Unlike stock prices, NAV does not change in real-time.

What affects NAV?

Several factors impact NAV fluctuations, including:

• Market movements: If stock or bond prices rise, the NAV increases, and vice versa.
• Dividend payouts: When mutual funds distribute dividends, NAV may decrease since assets are reduced.
• New investments or withdrawals: Large inflows or redemptions affect NAV as they alter the fund's total assets.
• Fund expenses: Management fees and operational costs reduce NAV over time.

Suggested read: What is an IDCW in mutual funds?

Does a low NAV mean a cheaper fund? (Common myth)

One of the biggest misconceptions is that a fund with a lower NAV is cheaper or better. However, NAV is just a reflection of how the fund is structured and does not determine returns.

For example, if two funds invest in the same stocks but one has a NAV of Rs 10 and the other Rs 100, their returns will still be the same if their portfolios perform similarly. What truly matters is the underlying investment strategy and historical performance of the fund, not its NAV.

Suggested read: Low NAV doesn't mean cheaper fund

How does NAV vary in different types of mutual funds?

NAV behaves differently based on the type of mutual fund:

• Equity funds NAV fluctuates based on stock market movements.
• Debt funds NAV changes based on bond prices and interest rate trends.
• Hybrid funds A mix of equity and debt affects NAV behaviour.
• Index funds: The fund closely tracks the performance of the underlying stock index. Hence, the NAV changes based on fluctuations in the index it is mirroring.

How is NAV used in mutual fund investing?

NAV plays an important role when investing in mutual funds:

• Buying and selling units: Mutual fund units are bought and sold based on NAV.
• SIP investments: Systematic investment plans (SIPs) allow investors to buy units at different NAVs over time, averaging out market volatility.
• Lump sum vs SIP: In lump sum investing, NAV determines the number of units bought, whereas in SIPs, NAV fluctuations help with rupee-cost averaging.

Suggested read: SIP vs Lumpsum: Which investment strategy is better?

NAV vs AUM (Assets Under Management): What's the difference?

Many investors confuse NAV with AUM (assets under management), but they serve different purposes:

• NAV: Reflects the per-unit value of a fund.
• AUM: Represents the total size of the fund, calculated as NAV × total units outstanding.
• Why a higher AUM is not always better: A large AUM does not guarantee better returns; fund performance and strategy matter more.

How can you check the NAV of a mutual fund?

Investors can check NAV through multiple sources:

• AMFI website: The Association of Mutual Funds in India (AMFI) provides daily NAV updates.
• Fund house websites: Mutual fund companies publish their NAVs regularly.
• Investment apps: Many apps and platforms provide real-time NAV updates and historical data.

Checking past NAV trends can help investors understand fund performance before making an investment decision.

Conclusion

NAV is an essential concept in mutual fund investing that can signal whether a fund has grown or not. That said, it is an indicator of price and not value of a fund. Instead, you should assess the portfolio construction, historical performance, expense ratio, and much more. These metrics will give you an understanding of whether you're getting a bang for your buck.

Rather, most investors make the mistake of assuming that a low NAV equates to a cheap fund. Don't make the same mistake. Additionally, focus on how well a fund is run and the stability in fund management.

Also read: The price of misunderstanding price

This article was originally published on May 06, 2025.