I have been receiving a bunch of questions about what NAV means so let’s tackle that topic today. NAV stands for net asset value, which represents the net value of a fund. It is the total value of a fund’s assets minus the total value of its liabilities divided by the number of units issued. NAV represents the per unit price of the fund on a specific date, which typically is the closing of the previous market day.
Now let’s go into it a little deeply and further get an insight about NAV and mutual funds.
A fund works by collecting money from a large number of investors. It then uses the collected capital to invest in a variety of stocks and other financial securities that fit the investment objective of the fund. Each investor gets a specified number of units in proportion to their invested amount, and they are free to sell (redeem the value of) their fund units at a later date and pocket the profit—or lament the loss. Since regular buying and selling (the investment and redemption) of fund units start after the launch of the fund, a mechanism is required to price the units of the fund. This pricing mechanism is based on NAV and is always considered per unit.
Unlike a stock, whose price changes with every passing second, mutual funds don’t trade in real-time. Instead, mutual funds are priced based on the end-of-the-day methodology based on their assets and liabilities.
The assets of a mutual fund include the total market value of the fund’s investments, cash and cash equivalents, receivables and accrued income. The market value of the fund is computed once per day based on the closing prices of the securities held in the fund’s portfolio. Since a fund may have a certain amount of capital in the form of cash and liquid assets, that portion is accounted for under the ‘cash and cash equivalents’ heading. Receivables include items such as dividend or interest payments applicable on that day, while accrued income refers to money that is earned by a fund but yet to be received. The sum of all these items and any of their qualifying variants constitute the fund’s assets.
The liabilities of a mutual fund typically include money owed to the lending banks, pending payments and a variety of charges and fees owed to various associated entities. Additionally, a fund may have foreign liabilities; these could be the shares issued to non-residents, the income or dividend for which payments are pending to non-residents, and sale proceeds pending repatriation. All such outflows may be classified as long-term and short-term liabilities depending upon the payment horizon. The liabilities of a fund also include accrued expenses, like staff salaries, utilities, operating expenses, management expenses, distribution and marketing expenses, transfer agent fees, custodian and audit fees, and other operational expenses.
To compute the NAV for a particular day, all these various items falling under assets and liabilities are taken at the end of a particular business day.
Now let’s take a look at some the queries that I get asked by clients and friends:
“I am getting this fund’s units at Rs 10 since it is an NFO (New Fund Offer). I am getting it cheap and I want to invest.”
“I want to invest in mutual fund A with a NAV of Rs 105 as mutual fund B has a NAVof Rs 250. Will it be profitable to buy mutual fund A?”
Let me explain this with an example.
Consider that there are three mutual fund companies—A, B and C.
All the above funds are investing in just one company’s shares, let’s say HDFC Bank (just as an example). The price at NFO for all the funds is Rs 10 per unit and there are no income and expenses (to keep it simple).
Mutual Fund A was launched on 2 Sept 2016.
Mutual Fund B was launched on 7 Sept 2018.
Mutual Fund C was launched on 4 Aug 2021.
Mutual fund C is offering a unit at Rs 10. Would this be cheap? And will it give more returns than the other two? Please take a look at the chart below.
| Fund | Date of Launch (NFO) | Price per unit | HDFC Share price on these dates | NAV on 7th Sept 2018 | NAV on 4th Aug 2021 |
| A Mutual Fund | 2 sept 2016 | 10 Rs | 642.55 Rs | 16 Rs | 22.89 Rs |
| B Mutual Fund | 7 sept 2018 | 10 Rs | 1028.47 Rs | NFO – 10 Rs | 14.30 Rs |
| C Mutual Fund | 4 Aug 2021 | 10 Rs | 1470.90 Rs | Not yet launched | NFO – 10 Rs. |
As per the above table, if one had bought units on 7 Sept 2018 from mutual fund B at Rs 10, or from mutual fund A for Rs 16, it would have given the same returns on 4 Aug 2021. And going forward, if one invests in any of the above funds whatever the NAV, the returns will be similar since it is investing in the same security!
So one needs to understand where the fund is investing and how the underlying security (company)/ or the economy is performing to evaluate the future returns from the investments.
I hope the above explanation and example have made things clear, but if you still have any queries please feel free to call me.
Note: Some technical details were gathered from investopedia and public portals.
Thank you,
Anand Mhapralkar
CERTIFIED FINANCIAL PLANNER CM
+91 9820663784
Anant Wealth 