Net Asset Value

What is Net Asset Value (NAV)?

Net Asset Value (NAV) is the per-unit market value of a mutual fund. In simple terms, it represents the true worth of a unit of the mutual fund scheme is otherwise called Net Asset Value (NAV). If a mutual fund were to be liquidated, the NAV is the amount that each investor would receive per unit after all assets are sold and liabilities are paid off.

Importance of NAV

The NAV is a critical metric for mutual fund investors for several key reasons:

• Pricing: NAV is the price at which investors buy (purchase) or sell (redeem) units of a mutual fund. Unlike stocks, which are traded throughout the day at fluctuating prices, mutual fund transactions are processed at the end-of-day NAV (Open ended Mutual Funds).
• Performance Tracking: By tracking the NAV over time, investors can monitor the performance of their investment. A consistently rising NAV indicates that the fund's underlying assets are growing in value.
• Transparency: The daily calculation and publication of NAV provide investors with a clear and up-to-date valuation of their holdings, ensuring transparency.
• Fair Valuation: It helps investors determine the fair value of a fund's units and allows for a standardised comparison of performance between different funds in the same category.

How is NAV Calculated?

The formula for calculating NAV is straightforward:

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

Let's break down the components:

• Total Assets: This includes the market value of all securities (stocks, bonds, etc.) in the fund's portfolio, plus any cash, accrued income, and other receivables.
• Total Liabilities: This includes all the fund's expenses, such as management fees, administrative costs (Total Expense Ratio), and any other outstanding payments (Like few investors redeemed their units but are yet to be paid).
• Total Outstanding Units: This is the total number of units held by all investors in the fund.

Example Calculation:

Imagine a mutual fund has the following:

• Market value of securities: Rs. 100 crore
• Cash and other assets: Rs. 10 crore
• Total liabilities: Rs. 5 crore
• Total outstanding units: Rs. 2 crore

The calculation would be:

• Total Assets = Rs. 100 crore + Rs. 10 crore = Rs. 110 crore
• NAV = (Rs. 110 crore - Rs. 5 crore) / 2 crore units = Rs. 52.5 per unit

Other Important Details

• Calculation Frequency: In India, as regulated by the Securities and Exchange Board of India (SEBI), NAV must be calculated and published at the end of every trading day. This is based on the closing prices of the securities in the fund's portfolio.
• Impact of Distributions: When a mutual fund pays out dividends or capital gains to its unit holders, the NAV of the fund will decrease by the amount of the distribution per unit. This is because the distribution reduces the fund's total assets.
• Not an Indicator of "Cheap" or "Expensive": A high NAV does not necessarily mean a fund is expensive, nor does a low NAV mean it is cheap. The NAV simply reflects the market value of the underlying assets. An investor should focus on the percentage change in NAV over time  (i.e., the fund's returns or growth) rather than the absolute NAV value.
• Open-End vs Closed-End Funds:
  • For open-end funds, NAV is the price at which units are bought and sold directly with the fund house. Meaning Price of the fund will be same as the NAV of the Fund
  • For closed-end funds, which are traded on stock exchanges, the market price of a unit can be higher (at a premium) or lower (at a discount) than its NAV, based on market demand and supply. Meaning Price of the fund will be different from the NAV of the Fund

Regards,

Honvest Team