Category : Investing Guides August 14, 20245 minutes read
To understand how your mutual fund is performing, you need to find out what is NAV in mutual funds. The full form of NAV in mutual funds is Net Asset Value and it refers to the value of a single unit of a mutual fund. Each mutual fund has a set number of outstanding units based on which investors are able to purchase the units. In this guide, we’ll take a deeper look at what is NAV in mutual funds and how much importance you should be attaching to an NAV when investing.
Introduction
There are a number of different metrics by which investors make investment decisions. If you are a new investor, you must be coming across the NAV or net asset value of a mutual fund fairly often. Net asset value calculation is standardised across the Indian market and published online on the fund’s investment dashboard.
What is NAV in mutual funds? Each mutual fund is split into a predefined number of units and when you invest in a mutual fund, you are investing in these units. The NAV of mutual funds in India refers to the net asset value of a single unit on a given day. The higher the NAV of a fund, the more it costs to invest in a single unit of that fund.
There is a misconception that low NAV mutual funds are better to invest in, but there is no reason to suggest that a higher or lower NAV makes a fund more suitable. Several factors play a role in helping an investor decide the suitability of a fund, and NAV is one of them. What is NAV in mutual funds? The NAV of mutual funds of India is the price of a single unit of the mutual fund on a given day and nothing more. It may be better to make your investment decisions based on the past performance of the fund and the general performance of different kinds of funds in India.
Though it sounds a little complicated, calculating the NAV in stock market funds is actually quite easy. To put it simply, the formula for net asset value calculation is the Net Assets of the Scheme divided by outstanding units. The net assets of the scheme is calculated by summing up the total assets and subtracting any liabilities of the fund as per the NAV formula for mutual funds.
Typically, the NAV of mutual funds in India is calculated by dividing the difference of assets and liabilities by the number of outstanding units.
((Assets – Liabilities) / outstanding units)
However, mutual funds are unlikely to have any direct liabilities and therefore all calculations are made on current investments and assets.
The importance of NAV of mutual funds in India comes when investing and redeeming units in a mutual fund after the start date. This is to ensure that investors who are exiting are getting a fair price as well as tracking the growth of the mutual fund in terms of value per unit.
On face value, the NAV is not really very important to an investor, as it just signifies the cost of investment or return on redeeming a unit in a mutual fund. The net asset value of mutual fund units is important when viewed from a growth perspective. A fund with a good track record of growing, its NAV is more likely to be a better investment.
Invest via SIP with Bandhan Mutual Fund
Another important point of impact is NAV in SIP investments in mutual funds. Let’s say you are investing rs. 20,000 every month via an SIP. In the first month as the mutual fund (post NFO period), if a single unit costs Rs. 100, in the subsequent month, each unit may cost Rs. 122, meaning, you will not get the same number of units on your second investment due to the difference of NAV in each phase. As the NAV grows, each subsequent investment will give you a lower number of units, although the value invested remains the same.
If you are investing a lumpsum amount in a mutual fund you will be purchasing mutual fund units at the current net asset value, so the number of units you receive = investment amount / NAV.
- What is NAV in mutual funds? It is the current price of one unit of a mutual fund.
- The NAV of mutual funds in India does not determine if the mutual fund is worth investing in. A high or low NAV mutual fund does not impact investment success.
- To calculate what is NAV in mutual funds, you must divide the total asset value of a fund by the number of outstanding units. If there are any liabilities, they must be subtracted from the total asset value.
- The growth rate of a fund’s net asset value is an important indicator of how the fund is performing. NAV of mutual funds in India can be high due to a stronger starting unit price or due to the growth the fund has experienced.
