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 7th July, 2017 was Rs 145.536 per unit.
So, you would get around 68 units for your investment of Rs 10,000.
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 ;
Debts can be ; (Kindly note that here Debts does not mean the debt investments, but these are liabilities that a scheme owes.)
All Mutual Funds are required to publish their NAV at every business day as per SEBI guidelines.
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?
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.
Continue reading :
(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)
This post was last modified on July 11, 2023 6:49 pm
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i want to invest lumpsum 20k in mf for 3 yrs. which will be best for returns after 3 yrs.
Aslo want to start SIP of 500 rs for 15 yrs. Kindly suggest the schemes.
Dear Ganesh,
For 3 years horizon, you may consider investing in an Ultra Short term or Short term debt fund.
For long term goal, you may pick a multi-cap fund like Birla Equity Fund.
Related article : Best Mutual Funds 2018-19 | Top Equity Funds post SEBI’s Reclassification
Very good article. Net Asset Value (NAV) is the total asset value per unit of the fund. The Asset Management Company calculates NAV at the end of every business day. Net asset value reflects the realisable value that the investor will get for each unit if the scheme is liquidated on that date.
Thanks you so much for such lucid explanation
Hi Sree
Have been your avid follower. Here's my question needing your suggestion.
I have invested 45 lacs in Liquid/Debt funds over the last 6 months from which I had started to do STP to Equity/Balanced funds. I had not invested the amount directly in Equity funds as i will be redeeming 90% of the money invested within the next 4 months to purchase a flat (costing about 40 lacs).
I also have 32 Lacs unutilized funds right now which I want to invest in some 5-6 good mutual funds for atleast 4-5 yrs.
1. What are some of the good funds that I can invest this 32 lacs in? I'm looking for High performing funds which will yield yearly returns of Rs.45000 from year 3 onwards. And there are no other financial goals I have apart from the above situation.My risk appetite is average.
2. Can I invest say 5 Lacs in say 6 Funds in one shot? is it advisable to do this considering that the NAV may be at peak for some funds? Or whats the other way to distribute and invest 5 Lacs in 6 funds max?
Thanks
Vivek
Dear Vivekanand,
Thank you for being a loyal blog reader!
You mean to say that your investment of Rs 45 lakh has a time-frame of around 4 months only??
1 - If your time-frame is around 5 years, you may set up STPs to Equity oriented balanced funds (for Rs 32 Lakh). You may then set up SWP (Systematic Withdrawal plan) from this corpus when required.
2 - May I know your investment objective and time-frame for this? (Rs 5 lakh).
Suggested readings :
Best Balanced funds
How to pick right mutual fund schemes?
MF portfolio overlap analysis tools
What is 200 Day moving average?
Hi Sree... Let me clarify.
The 45 Lacs was already invested in Liquid funds 6 months back. I need those funds shortly (in another 3-4 months) for house purchase. So yes the total time frame this 45 L was invested would be 10 months only max.
1. However i want my current cash in Hand of Rs.32Lacs to be invested for long term. 5 yrs as you suggested.
2. And by 5 lacs, what i meant is 5 Lacs * 6 funds (amounting to approx 32 Lacs as mentioned in point 1). Instead of doing an STP , can I directly split this 32 Lacs into 5-6 Balanced funds / good MFs that you suggested?
Dear Vivekanand,
Ok. 10 months time-frame for equity oriented MFs can be very risky and I assume you have accounted for the possible risk factors!
1 & 2 - Considering the current market state, your time-frame and risk profile, may be STP would be a better choice to lump sum investment.
You may pick couple of balanced funds and one Large cap fund.
Hello Sreekanth
How is dividend calculated for a mutual fund?
Are dividends based on the face value of a mutual fund or is it based on the NAV value of a mutual fund?
If some MFs dividends are based on face value and some on NAV then how do we identify these funds or separate out these funds from each other?
Dear Vineet,
Dividend is paid out based on the NAV figure.
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.
This Rs 2 is per unit.
And on what basis is the dividend calculated ?
Dear Vineet.. The calculation is on Face value of the units.
For ex : The investor will receive 20% of Rs 10 (face value) on 200 units = Rs 2/unit = Rs 400 as dividend. And if the NAV is say Rs 100, then it falls by Rs 2 after the dividend payment.
Hello srikhant sir,
Why mutual fund companies are not giving bonus units to the investors?
As bonus shares are given to the investors in equity markets similar to this why not mutual fund companies are not giving to the investors?
Thanks
Manoj
Dear Manoj,
The dividend income or bonus shares received etc by the MFs are factored in the NAV of the schemes.
Hi Sreekanth,
I'm a regular follower of your blog...many thanks for your insights on financial planning, appreciate your work.
I've a question on NAV of mutual fund, if i'm going to invest 10,000 rupees on HDFC balanced fund and suppose the NAV is 100 rupees at the time of purchase, i should be allotted 100 units.
Will the fund house go and purchase 100 units worth of shares out in the market to add to the portfolio assets before they allot me the units? How's it that fund house can issue more units? Is there a cap on how much units the fund house can issue?
Thanks in advance for your reply.
Krishna
Dear Krishna,
Thank you being a loyal reader and for your appreciation!
The amount invested by the investors is allocated to fund portfolio based on its investment objective. The funds do maintain some Cash in hand and may not invest the total amount in the market. The fund just allocates the units based on your quantum of investment and the applicable NAV.
The fund may or may not invest the entire amount in the market. The schemes can be debt oriented also.
The fund houses have to adjust / account for lot of expenses also.
Sir,
i'm new new in Mutual fund investment, i have chosen the below fund
1. reliance mid & small cap fund (G)
2. Kotak select Focus Fund (G)
3. L&T emerging Business Fund (G)
4. Mirae Asset emerging blue chip fund (G)
5. SBI bluechip fund (G) for 36 month. Please guide me if anything need to be changed and also let me know about small cap fund which can more beneficial to achieve my goal.
Dear Rahul ..May I know your investment horizon and objectives?
Is 36 months period your time-frame for all the listed funds?
Thanks for yr prompt reply. would it be fair to invest say 50 lakhs , 25 l each in hdfc balance fund and birla sunlife balanced 95 fund both growth-direct or any other suggested by you with SWP after 12 months. Again whether lumpsum or liquid to balance ( say in 18 months with STP) type investment would be better. Kly suggest good liquid fund schemes with STP for short duration. I would also like to know the IT payable on it( liquid fund). whether it would be short term capital gain only ( say 1.5 l *18 months=24l) and in that case ITR -I Saral can't be used.
kind regards
S.N.Singh
Dear Mr SINGH,
Equity oriented balanced funds are a good choice but kindly do note that they have MODERATE risk profile.
STPs are treated as normal redemptions and taxes on Capital gains (if any) are applicable. Yes, you may have to file ITR 2 in that case.
Kindly read :
Mutual fund taxation rules
Which ITR form to file?
Ex : HDFC Liquid fund ->STP-> HDFC Balanced fund
Birla Cash Plus -> STP -> Birla Balanced fund '95.
I am working in a Public sector co. due to retire on Sept 30, 2017. I am likely to get approx. 75to 80 lakhs from PF and gratuity. Apart from investing 15 l in sr citizen scheme and 7.5 l in LIC ( recently launched), I will have approx 60 l for investment. The return from these investments and employee pension scheme will be apprx 20,000/ month.I will need around 20, 000/ more per month say after ( after 12 to 18 months from investment). I hv mediclaim policy by company ( flotter 5 lakhs jointly). would be grateful if u could suggest investment schemes suiting my requirement.
I also want to invest say 5 lakhs for 20 yrs for my granddaughter ( 2 yrs old). kly suggest some good investment plan.
Dear Mr SINGH,
You may consider options like Post office MIS scheme, 8% Govt of India bonds..
In case, you can afford to take some risk then you can set up SWP (systematic withdrawal plan) on a Debt fund / Conservative MIP Fund. Also, some amount in any upcoming Secured non-cumulative NCDs.
For Grand daughter's related goal - you may consider investing in a diversified equity fund and an equity oriented balanced fund.
Kindly read :
List of best investment options
Best Equity funds.
Sir I want to invest in reliance mutual funds.Kindly suggest schemes here as I want to keep money in its differant funds.
Dear AHUJA ..May I know your investment time-frame? and why Reliance AMC schemes only?
Thanks for reply.I am totally new for mutual funds.In fact no special reason for reliance only by chance I while looking on line got immidiate account and started.I have to time frame and want money at any time if returns are not satisfactory.Invested in lumpsum.Rs 30000 in Gold saving fund and 15000 in liquid fund.Target is about rs 100000 but if result good then may increase.Your article is very good but your personal suggestion will be more usefull and am waiting for....
Dear Mr AHUJA,
Kindly go through below articles ;
How to create solid investment plan?
Best Equity funds
Kindly consider investing in Equity funds if you have long time-frame, say at least 5+ years.