What is Mutual Fund NAV? How is it calculated? | Should you avoid Funds with Higher NAVs?

We often get to hear a term called ‘net-worth’. What does it mean? – It means the value of everything you own (Assets) minus all your debts/liabilities.

For example : You own a commercial complex of Rs 1 cr and you have a taken a home loan of Rs 25 Lakh, in this case your net-worth is Rs 75 Lakh.

The concept of Mutual Fund NAV (Net Asset Value) is very similar to Networth. When you invest in mutual funds you are allotted certain units of that scheme. If you invest say Rs 10,000 in a scheme, you will receive units worth Rs 10,000. Now, how does the fund figure out how many units to allot to you?

This is where, NAV comes into picture! You get the units based on NAV of the fund. . NAV is the per-unit value or per-unit price of a particular mutual fund scheme.

For example : Let’s say you would like to invest Rs 10,000 in HDFC Balanced Fund (Growth-Direct plan). The NAV of this fund as on 7^th July, 2017 was Rs 145.536 per unit.

So, you would get around 68 units for your investment of Rs 10,000.

What is Mutual Fund NAV ? How is it calculated?

Mutual funds invest the money collected from investors in securities markets. These securities can be Stocks, Bonds, Company Fixed Deposits, Futures & Options etc., They invest the corpus based on a scheme’s investment objective and type of a scheme. So, an Equity fund primarily invests in Stocks and the same way a debt fund invests primarily in portfolio of debt securities.

To make these investments, the fund houses do incur some expenses and also have to bear some liabilities. Hence, the NAV of a mutual fund scheme is the total value of its holdings net of admissible expenses.

And the NAV per unit is determined by dividing the NAV by the number of units held by investors.

In simple terms, NAV = (Assets – Debts) / (Number of outstanding units)

The Assets of a Mutual Fund Scheme can be ;

• Market value of MF Scheme investments (Shares, Bonds etc.,) (The market value of the stocks & debentures is usually the closing price on the stock exchange where these are listed.)
• Cash
• Any receivables & liquid assets
• Accrued Dividends (on stocks) & interest income (on debt securities) etc.,

Debts can be ; (Kindly note that here Debts does not mean the debt investments, but these are liabilities that a scheme owes.)

• Liabilities
• Scheme related Expenses which are accrued (typically referred to as ‘Expense Ratio’.)

All Mutual Funds​​​ are required to publish their NAV at every business day as per SEBI guidelines.

Why is NAV useful?

As discussed above, the NAV primarily reflects the value of the securities in the portfolio. It is influenced by the market price of the securities in the portfolio.  Based on the change in NAV over a period of time will let you know whether you have a loss or gain on your investment.

So, do you need to invest in a mutual fund scheme based on NAV figure?

NAV & Misconception

The major misconception that many of us have is – a higher NAV means that a particular scheme is more expensive than a fund with lower NAV. A higher NAV fund means you get lesser number of units, hence low profits.

This is wrong! You should not short list a mutual fund scheme based on NAV figure.

The NAV is just a number and when you are short listing MF schemes, you need to compare their performances (Returns) and not the NAVs. It is the value of your investment which is more important than the number of units held by you.

For example : In the above table, if you notice that the NAV of ICICI Pru Balanced fund is lower than NAV of HDFC Balanced Fund’s. The general perception is lower NAV is good and gains can be more. If you look at the performance of these schemes, HDFC Balanced fund has given better returns than ICICI Balanced fund, though its NAV was comparatively high at the time of investment.

 NAV & FAQs

• Is NAV calculated after adjusting for Expense Ratio? – Yes. NAV is obtained after subtracting the expense ratio of a fund. This expense ratio is the total of all expenses made by the mutual fund annually. The list of expenses can be like ; operating expenses, management fees, distribution and marketing fees, transfer agent fees, custodian fees. audit fees etc.,
• Why does NAV of a Regular Plan and Direct plan of the same scheme differ? Direct mutual funds plans are those where AMC / Mutual Fund Houses do not charge distributor expenses / trail fees / transaction charges. When you invest in a mutual fund’s direct plan, you deal with the AMC directly, while in a regular plan you invest through a distributor or advisor. Direct mutual fund schemes have lower Expense Ratio than that of Regular plans. This is the main reason why the NAV of a direct plan will be higher than the NAV of a regular plan of the same scheme. (Related Article : ‘MF Direct Plans Vs Regular Plans – Returns Comparison‘)
• What happens to NAV when a scheme declares dividend? – The NAV of a mutual fund scheme comes down to the extent of amount of dividend paid out. Generally, this fall in NAV is very precise in case of Equity mutual funds. For example, if a fund has NAV of R 60 and declares Rs 2 dividend, the fund will have to sell portfolio holdings amounting to Rs 2 in the market and pay this out as dividend. The NAV will get reduced by this sum and become Rs 58.
• Will I get same day NAV price for my investment? Are there any cut-off timings? – Kindly note that that there are no cut-off timings for making mutual fund investments. However, cut-off timings do exist to determine the applicability of NAV. The allotment of NAV depends on the time you submit your application and money with the fund house. If you invest before cut-off time, you get same day NAVs on Equity Funds. The cut-off time for Equity funds is 3 p.m. The cut-off time for Liquid funds is 2 p.m. If you invest before this cut-off time, you get previous day’s NAV.
• Do mutual funds also receive Dividends on Shares? – Yes. Mutual Fund schemes that own shares/ stocks in their portfolios will receive Dividends (if any).
• How frequently NAVs of mutual fund schemes are declared? – Mutual Fund Schemes NAVs are declared on daily basis. They are usually declared after the closing hours of the Exchange(s).
• What is the impact of Exit Load (if any) on NAV? – At the time of mutual fund redemption, the amount you get will be present NAV minus the exit load, if any. (The exit load is charged only if you redeem your units before a defined period.)
• Can NAV per unit rounded off? – As per SEBI’s guidelines, to ensure uniformity, mutual funds can round off Net Asset Value up to four decimal places for index funds / debt funds and up to two decimal places for all equity-oriented and balanced schemes. (However, mutual funds have the freedom to round off the NAVs up to more than two decimals places in the case of equity-oriented and balanced schemes.)

Continue reading :

• Mutual Funds are subject to Market Risks! – My opinion
• What is 200 Day Moving Average? How to track DMAs? How to use them in Mutual Fund Buying decisions?
• Best Equity Mutual Fund Schemes

(Kindly note that Mutual Funds are subject to market risks and past performance may or may not be repeated.)

(Featured Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (References : moneycontrol.com & valueresearchonline.com) (Post first published on : 10-July-2017)