What Is NAV in Mutual Funds and Why Does It Matter?

What is NAV in Mutual Funds?

NAV stands for Net Asset Value. In simple terms, it represents the per-unit market value of a mutual funds scheme. If you’re investing in a mutual fund, NAV is the price you pay per unit.

Here’s how NAV is calculated:

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

• Total Assets: This includes the market value of all securities in the fund’s portfolio (like stocks, bonds, etc.), plus any cash or receivables.
• Liabilities: Expenses, fees, and any money the fund owes.
• Outstanding Units: Total number of mutual fund units currently held by all investors.

NAV is calculated at the end of each business day, based on that day’s closing market prices. Thus, it can fluctuate daily.

NAV and mutual fund performance: Are they linked?

Here’s where a lot of new investors get confused: a low NAV does not necessarily mean a mutual fund has lower returns or is available at a lower price. Similarly, a high NAV doesn’t mean the fund is expensive or that it has offered better returns.

Think of NAV like the price per slice of a cake. A smaller cake might cost ₹200 with 10 slices (₹20 per slice), and a bigger one ₹500 with 20 slices (₹25 per slice). The per-slice price (NAV) is different, but it doesn’t tell you which cake tastes better. What matters is how that NAV grows over time.

For example:

• A fund with a NAV of ₹20 that grows to ₹24 in a year has given you a 20% return.
• Another with a NAV of ₹100 that grows to ₹110 has given you only 10%.

Example for illustrative purposes only.

So, instead of fixating on today’s NAV, focus on:

• Historical returns
• Fund performance consistency
• Fund manager track record
• Portfolio composition

Past performance may or may not be sustained in future

Why NAV Matters

Here’s why NAV is important to understand, even if it doesn’t indicate a fund’s return potential:

• Entry and Exit Price: NAV is the price at which you buy or redeem mutual fund units. If you’re investing ₹10,000 in a fund with a NAV of ₹50, you’ll get 200 units. If the NAV later rises to ₹60 and you redeem, your units would be worth ₹12,000. *Example for illustrative purposes only.
• Tracking Potential Returns: NAV enables you to track how much your investment has grown. The percentage change in NAV over a period is your return.
• Understanding Timing Impact: Especially in SIPs (Systematic Investment Plans), the NAV on each investment day affects how many units you receive. Lower NAV = more units, higher NAV = fewer units.

Does NAV Impact Potential SIP Returns?

Not directly. With SIPs, you invest a fixed amount regularly. Thanks to something called rupee cost averaging, you may potentially benefit from market ups and downs:

When NAV is low, you get more units.

When NAV is high, you get fewer units.

Over time, this may help even out the cost of units and can potentially reduce the impact of market volatility.

If you’re curious to see how your SIPs could potentially grow over time, an SIP mutual fund calculator can be helpful. It allows you to input your monthly investment, expected returns, and time horizon to estimate the future corpus.

NAV and Different Mutual Fund Types

NAV behaves differently based on the fund type:

• Equity Funds: NAV can fluctuate significantly due to daily market movements. These are more volatile but may offer higher long-term growth potential.
• Debt Funds: NAV is relatively stable but still affected by interest rate movements, credit risk, and bond duration.
• Liquid Funds: Generally maintain a relatively stable NAV per unit due to their investment in short-term debt instruments that help mitigate market volatility.

So, understanding the risk-return profile of your fund helps you understand how the NAV might behave and keep you better prepared for the ups and downs of the market.

Conclusion

NAV is just one part of the mutual fund puzzle, but understanding it gives you an important lens into your investments. So, the next time you see a fund factsheet, you’ll have a more detailed view of what that number indicates – and what it does and does not tell you about your fund’s performance.

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

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investments involve risk, and past performance is not indicative of future results. Readers should conduct their own research or consult with a qualified financial advisor before making any investment decisions.