How Does Concept of NAV Work in Mutual Funds Investments?

If you invest in mutual funds or looking into the specifics of ETFs (exchange-traded funds), NAV might have shown up. For an experienced investor or a financial analyst, NAV (Net Asset Value) is the key indicator for a fund, while for someone new, it is the trading price of the mutual fund. No matter which side of the spectrum you lay on, if you are here looking to understand the concept of NAV, this is it.

Let’s jump into the specifics and give you some insights on how NAV works in mutual funds.

What does Net Asset Value mean and signify?

In literal terms, asset value means the price you need to pay to own a specific asset. As for the mutual fund NAV, it is the net value of all the assets in the mutual fund minus any liabilities associated with it. Now this may be confusing if you see that a fund’s NAV is lower than the actual price of the composing equity. Unless you understand that the NAV is represented as per unit price, i.e. the per unit of the total shares/ assets under that mutual fund. Therefore, in simpler terms, it is the price of ownership for a single unit of the mutual fund, irrespective of its composition.

How is the NAV calculated for a Mutual Fund?

A mutual fund is often built up as a collection of different shares, debt products, bonds etc., based on its design. And the market price of each of these underlying assets contributes to the overall asset value of the fund. On the other hand, the fund has a bunch of liabilities, i.e. fees, expenses, management charges etc. And finally, there is the total number of shares/ units owned by the fund manager under that mutual fund.

Therefore, the NAV is the net of total assets minus the total liabilities per unit for the mutual fund.

This value is usually calculated at the end of any trading day and serves as the buying/ selling price for investors for the fund per unit.

How is it affected by fund performance and expenses?

The value of a mutual fund is influenced by the value of the underlying assets and the involved expenses. Depending on the market performance and value of the equity, cash or assets that form the fund, the NAV can grow or fall. The fund managers are responsible to manage and trade these assets accordingly to achieve the investment objective of the mutual fund.

This, in turn, leads to expenses like trading and management expenses, administrative charges, fund management costs etc. All of which contribute negatively to the expenses and expense ratio of the mutual fund. Therefore, for any mutual fund, it is a balance of good returns, market risk exposure and active management that influences NAV.

As per the regulations set forth by SEBI and exchanges, the NAV is published for each trading date. The fund managers and mutual fund houses are obligated to ensure complete transparency on expense ratios, returns and assets under management for the mutual fund. Therefore, allowing the investors to make their investment decisions and ensure security.

Post Author: Alison Lukas