Understanding mutual fund NAV and its importance

As an investor, understanding NAV or net asset value of mutual funds is crucial. It’s an important metric that indicates how much one share of the fund is worth. Knowing the NAV can help you determine whether a mutual fund is overvalued or undervalued, making it easier to make investment decisions.

Imagine this, you are looking to invest in a mutual fund and come across two funds with similar returns. However, one fund has a higher NAV than the other. Which one do you choose? That’s where knowledge of NAV comes in handy.

How is a mutual fund NAV calculated?

The formula to calculate the NAV of mutual funds is: NAV = (total assets – total liabilities) / total outstanding shares.

For example, suppose a mutual fund scheme has a total asset value of Rs. 100 crore and total liabilities of Rs. 10 crores. Number of outstanding shares is 1 crore, then the NAV will be calculated as follows:

NAV = (100 – 10) / 1 = Rs. 90 per share

What factors affect mutual fund nav?

The effect of stock or bond prices on NAV

Mutual funds invest in different asset classes and securities, such as stocks and bonds. The prices of these securities fluctuate every day and therefore, the NAV of a mutual fund is also subject to these daily changes.

For example, if the majority of the stocks or bonds that a mutual fund is invested in experience a decline in their prices, the mutual fund’s NAV will also fall. Similarly, if the prices of the securities held by the mutual fund increase, the NAV will also rise.

The impact of fees on NAV

Every mutual fund incurs expenses and fees, known as total expense ratio (TER). The daily NAV of any mutual fund scheme is based on these expenses that may include management fees, administrative costs, investment and advisory fees, and marketing expenses. Therefore, even if two mutual funds have similar assets under management, a mutual fund with higher fees may have a lower NAV than a mutual fund with lower fees.

Role of the market in NAV fluctuations

The NAV of a mutual fund is also impacted by the market. This means that if the overall stock market performs well, mutual funds that hold stocks will also perform well, and their NAVs will increase. Conversely, if the stock market experiences a downturn, mutual fund values may fall, decreasing their NAV.

Buying and selling mutual funds

The NAV of a mutual fund can fluctuate throughout the trading day, but the price at which mutual fund shares are bought or sold is determined by the NAV at the end of the trading day when the trade was executed.

Note that if you place an order before cut-off time on any working day, then you will get the NAV of that particular day for your transaction. If your order is placed after the cut-off time, the following working day’s NAV will be applied for your transaction.

Why is a mutual fund NAV important?

Understanding mutual funds NAV is essential for investors who invest in mutual funds. The NAV of a mutual fund reflects its underlying assets and liabilities, and it changes daily based on market movements, interest rates, and the performance of the underlying securities. It helps investors track and compare mutual funds to assess their investment performance and make informed decisions about buying or selling.

So the next time you invest in mutual funds, make sure you are familiar with its NAV and how it is calculated so you can use the information to build a profitable investment portfolio.