How to interpret Net Asset Value (NAV) of mutual funds

Here’s How to interpret Net Asset Value (NAV) of mutual funds:

How to interpret Net Asset Value (NAV) of mutual funds

To be or not to be!

Dear, it all depends on the NAVs!


“NAVs” is the most commonly used term in mutual fund investments.

NAV is the price at which units of a mutual fund scheme are being offered to investors. It can be looked like the fund assets remaining after providing for the liabilities and fund expenses. You may call it as the market value of units of the fund.

NAV helps you in determining the usability of the scheme towards the achievement of your financial goals. By using NAV, you can track the performance of a mutual fund scheme.

NAV is influenced by price movements of the underlying assets. It indicates whether the fund is generating wealth for the investors or not. It can be ascertained by calculating the percentage increase in the mutual fund NAV.

Such a comparison can prove to be intuitive. Compared to bank FDs, mutual funds are risky investment vehicles. So, these should offer you better returns than FDs.

Hence, changes in the NAV reflect such information. If a mutual fund is giving returns less than FDs, then there’s no meaning of assuming a high risk by investing in the former.

How is NAV calculated?

NAV happens to be an essential element in the functioning of a mutual fund. As per SEBI guidelines, all mutual funds have to declare their NAV at every business day. Thus, it is reported after the closing hours of the stock exchange.

NAV is the residual value of assets of a mutual fund after deducting liabilities and expenses from it.

The calculation of NAV can be expressed by a formula:

NAV = (Assets – Liabilities)/(Number of Outstanding units)

The assets of a mutual fund consisting of stocks, bonds and cash are shown at their market value. It may also contain dividends distributed, interest accrued and liquid assets.

The liabilities of mutual fund consist of money owed to creditors and other expenses of the fund. Expenses are reflected in the expense ratio of the fund.

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Myths surrounding NAV

There seem to be so many misconceptions surrounding NAVs of mutual fund schemes. It may prevent you from making an informed investment.

Let’s have a look at these myths.

How to interpret Net Asset Value (NAV) of mutual funds

Myth 1: Low fund NAV is better than High NAV

You might be confused that “whether to choose a high-NAV fund over a low-NAV or vice-versa?”

Let’s solve this confusion with an illustration.

Suppose you are considering two multi-cap funds for investment, i.e., Aditya Birla Sunlife Advantage Fund & Principal Growth Fund. NAV of Aditya Birla Sunlife is higher than Principal Growth Fund. Hence, the number of units allotted to you would be more of latter than the former.

You might think that owning more units of a fund is virtuous, and it will help in wealth accumulation.

But you need to take a relook!

NAV isn’t an indicator of the intrinsic worth of an investment. It cannot become criteria towards fund selection. Instead, you need to look at factors like annualized returns and risk of a fund. You need to choose the fund which is more valuable and delivers higher returns over a period.

How to interpret Net Asset Value (NAV) of mutual funds
Going by the above premise, you need to compare the fund returns. Aditya Birla Sunlife has given higher returns than Principal Growth Fund. Hence, former is more valuable than latter. In spite of owning a lesser number of units, your chances of greater wealth accumulation are higher in former than the latter fund.

Myth 2: Regular Plans are better than Direct Plans

You might always find a mutual fund scheme available in two variants: direct and regular. Both are identical as regards investment objectives, portfolio holdings, investment style and even fund manager.

However, NAV of direct plans is always higher than that of regular schemes.

You are left perplexed “which one should be chosen?”

I say Go for the Direct Plan!

The reason being Direct Plan is more valuable and gives higher returns than Regular Plans. It’s because of a lesser expense ratio.

The expense ratio of direct plans doesn’t involve distributor commission as against regular plans. It lowers the expense ratio of direct plan vis-à-vis regular plans.

Expense ratio can cause a significant difference in mutual fund returns. After all, NAV is nothing but the residual after deducting all the liabilities and fund expenses.

The lower expense ratio of direct plans creates a lesser burden on fund assets. Hence, direct plans have a higher NAV than regular plans. So, direct plans facilitate in faster wealth creation than regular plans.

Myth 3: Dividend Option is better than Growth Option

After you have shortlisted a handful of funds, you tend to get stuck at this juncture:

“Should you go for growth option or dividend option of a mutual fund?”

Your final choice not only impacts your wealth accumulation but also affects the fund NAV. But all depends on your ultimate financial objective.

What exactly you want to do with your investments?

Whether you are a short-term investor or long-term investor?

Also read: Growth vs dividend option: which one to choose?

Whether you need regular income or wealth creation?

It would be intuitive to see why NAV gets impacted.

In growth option, the notional profits earned by the fund are reinvested. It leads to fund augmentation and NAV increases due to power of compounding.

Conversely, dividend option has an adverse impact on fund NAV. Suppose fund NAV was Rs 50 and fund declares a dividend of Rs 5. Under dividend option, the fund NAV gets reduced by the dividend declared. After payment of dividend, the fund NAV will be Rs 45 (Rs 50-Rs5).

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Myth 4: My mutual fund investments get priced at real time NAV

The NAV that applies to your investment depends on the time of investment; when does the fund house receive your money?

Usually, cut-off timings are followed by the fund house. The cut-off timings are different for liquid funds, equity funds, and debt funds.

In case of liquid funds, the cut-off timing is 2 pm. If you invest before 2 pm, you get previous day’s NAV. If you invest after 2 pm, you get same day’s NAV.

In case equity funds and debt funds, cut-off timing is 3 pm. If you invest before 3 pm, you get same day’s NAV. If you invest after 3 pm, you get next day’s NAV.


Final Words

NAV is meant to give a bird’s eye view of fund performance. But it can’t be the only criteria for fund selection. By busting these myths, you may gain much more from your investments.

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