Why you need to know about NAV if you are a regular investor?

Are you a regular investor? Look why you need to get abreast with NAV in mutual funds

Why you need to know about NAV if you are a regular investor

While trading or investing in mutual funds, one frequently comes across the term NAV. This is an important factor in deciding which fund to buy. In this article, we will examine why NAV is so important and consider its various aspects.

What is NAV? 

NAV or net asset value is not the market price of the fund; it is the value of the fund minus the liabilities divided by the fund units. For investment funds, it is calculated based on the closing prices of the portfolio’s securities. 

NAV is usually expressed per unit and NAV calculation is simple. Net asset value formula is given below.

NAV = (value of assets – value of liabilities) / number of outstanding units.

To better understand how NAV is calculated, consider the following example: 


Where can one find information about NAV? 

A fund’s net asset value is available in the same place where all fund information is available. For example, if you want to know the NAV of SBI Bluechip Fund, log on to any trusted site that gives information about the fund. On the same page, you will find information about its NAV. 

When an investor invests in a fund, they get a specific number of units that they can buy or sell in the stock market. When a person buys shares of a company, the prices are determined by the minute, based on the trading activity during the day. 

However, a fund’s price in the market is determined by its NAV. If the NAV goes up, the price of the fund also goes up. If the NAV goes down, the price of the fund also goes down. 

NAV helps an investor to determine if a particular fund is worth investing in or not. In an open-ended fund, it helps to determine what the returns will be when you withdraw your investment from the fund. In case of closed-ended mutual funds, it helps to determine whether the fund is trading below or above the NAV.

Two scenarios are possible when we find the NAV of a particular fund. If a fund has a very low NAV, it is possibly undervalued and may rise in the near future. On the other hand, if a fund has a high NAV, it is possible that the fund is overvalued and may hit the lower circuit in the near future. 

Related: How interest rates impact mutual funds 

Points about NAV that one should keep in mind

  • Net asset value includes the amount originally invested, the profits earned by the portfolio in the process of trading, and the appreciation it generates. 
  • Net asset value changes every day depending on how many units of the fund are bought and sold on that day. Hence, NAV is the net asset value of that particular day. 
  • Net asset value of all mutual funds are declared at the end of the trading day as per SEBI rules. 
  • Net asset value is much higher if the overall profits earned by the fund is high, the appreciation of the investments in the fund is high, and the expense ratio is kept to a minimum.
  • Net asset value can also be negative in rare circumstances, if the overall expenses exceed the profits and investments. 

How do Nifty and Sensex affect NAV?

Sensex and Nifty will affect the NAV if the mutual fund has invested in companies that are part of these indices. If a large-cap fund has invested greatly in the largest companies in India, the fund would be greatly affected. On the hand, a small-cap fund may not be affected as the companies the fund invests in may not be part of the two indices. 

A multi-cap fund may or may not be affected by the movements of Sensex and Nifty. If the fund has a greater large-cap portion and there are significant investments in the largest companies in the country, it will be affected by such movements. Even if there is equitable distribution of investments in large-cap, mid-cap, and small-cap funds, it is possible the fund may be influenced by Sensex and Nifty movements.

Related: What do market losses mean for mutual funds?  

What's the difference between NAV and stock price?

Though NAV and stock price can seem similar, one crucial factor sets them apart. That crucial factor is ‘demand’. NAV is literally the book value of the fund. It is the total assets – that is, the total liabilities divided by the number of units. On the other hand, share price is severely influenced by demand. If the demand goes up, the stock price increases; and if the demand goes down, the stock price decreases. 

There are a few other differences between NAV and stock price: 

  • Stock price is determined by how the analysts view a company and their performance in the future. 
  • Stock prices are quoted on the stock exchanges while NAV is not. 
  • Stock price is determined in real time while NAV is calculated at the end of the day depending on the fund’s performance. 

Related: The effect of COVID-19 on your mutual fund investments

What are entry and exit loads?

NAV is determined on a day-to-day basis. Investors who purchase open-ended schemes have the privilege of buying units of the fund from the fund and selling back units of the fund to the fund again anytime. These are known as sale transaction and repurchase transaction respectively. 

Earlier, funds were allowed to deduct a certain percentage (called ‘entry load’) from the investment. The same provision was given when an investor wanted to sell the units back to the fund. During the repurchase transaction, a certain percentage is deducted from the total sale proceeds, and known as ‘exit load’. 

The exit load is structured in such a way that if the investor sells the units within a year, they would have to bear a higher exit load. However, if they sell the units within 2 years, the exit load would reduce, and so on. This was done to ensure that investors held on to their investments for a longer duration. 

The rules have changed. According to a SEBI ruling, mutual funds can no longer charge an entry load. However, exit load exists even today and differs from mutual fund to mutual fund.

Related: Understanding NFOs: 5 Things you must know about this investment instrument 

Which funds have the highest NAV? 

Knowing how to invest and investing in the right funds will go a long way in securing a good future for yourself and your loved ones. In this section, we shall look at some funds that have the highest NAV. These investments will be useful whether you are looking at a short-term horizon or a long-term one.

NAV Funds

This article should have given you a fair idea of what NAV is and how NAV of a mutual fund is calculated. If you want further information on mutual funds, or wish to compare different types of funds, or know about savings accounts versus liquid funds, please visit here.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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