What does a mutual fund’s NAV mean for you as an investor?

A mutual fund is a pooled investment vehicle, wherein asset management companies raise capital from different investors and then invest that money in different asset classes. The buying and selling of mutual fund units are done according to the Net Asset Value on that particular day. So, what is NAV in a mutual fund? It is the price that you pay to invest in mutual fund.

How is NAV calculated?

The formula to calculate NAV is:

NAV = (Total Assets – Total Liabilities) / Number of Outstanding Units

NAV represents the value of the mutual fund on a particular date. When investors buy units of a mutual fund, the money is used to make a portfolio of different securities. The market value of all the securities combined is the asset of the mutual fund. So, when you deduct the liabilities and other charges from the market value of the assets and divide it by the number of units outstanding, you get NAV per unit.

Is NAV important to investors?

NAV shouldn’t be so important for investors. If the NAV of a mutual fund is low, it doesn’t mean that the mutual fund is cheap and a good investment. NAV depends on the market value of the assets and the number of units that are outstanding. If the outstanding units increase, the NAV will fall. Your investment decision should be dependent on your investment objective, risk appetite, and time horizon.

Can NAV and market price of mutual funds be different?

Yes, in the case of closed-end mutual funds. Closed-end mutual funds don’t accept fresh investments after the offer period. Their price is set up based on demand and supply. If the demand is high, the market price can be higher than NAV per unit.

Invest in mutual fund based on fund’s performance

Consider that there are two mutual funds in the market – Fund A and Fund B. The NAV of both a year back was:

Fund A – Rs. 20

Fund B – Rs. 150

The current NAV of both is:

Fund A – Rs. 22

Fund B – Rs. 180

So, the one-year return from both the mutual funds:

Fund A – 10%

Fund B – 20%

The NAV of Fund A was less than that of Fund B. The return generated by Fund B is double as compared to Fund A. As an investor, you should always invest in mutual funds based on the fund’s performance, and not based on the NAV.