What is Net Asset Value (NAV)? Understand its role in mutual funds like an expert.
Mutual funds have become the most popular investment option today. Retail investors are constantly expanding their financial knowledge, and SIP inflows are setting new records every month
.
But one thing that still remains confusing among investors is NAV, or Net Asset Value.
If you also consider NAV to be just a number, this article will clarify the entire concept for you.
What is NAV? (Understand in Simple Words)
The market value per unit of any mutual fund scheme is called NAV.
The formula for calculating it is:
NAV = (Total Assets – Total Liabilities) / Total Units
That is, the total assets of the fund, minus all expenses and liabilities, are divided by the total units.
👉 NAV is recalculated every trading day.
👉 You can check this on AMFI or the fund house's website.
Is a fund with a low NAV cheaper and a fund with a high NAV more expensive?
No. Absolutely not.
The biggest misconception is that a fund with a low NAV is cheaper, or a fund with a high NAV is more expensive. NAV only reflects the current value of the unit; it does not reflect the fund's performance.
Example:
There are two funds –
Fund A's NAV = ₹10
Fund B's NAV = ₹100
If both have given 10% returns in the last one year,
then both have given equal growth; NAV has nothing to do with it.
What is the role of NAV in mutual funds?
The main function of NAV is to provide transparency:
✔ What is the true value of a unit?
✔ How has the value changed over the past few days?
✔ What direction is the fund's growth?
It makes it easier for investors to buy, sell, and monitor their portfolios.
Why isn't NAV the only factor to consider while making investments?
Several crucial elements to take into account while selecting a mutual fund:
✔ 1. Portfolio Allocation
Which sectors does the fund invest in? Which companies are they involved in?
2. The Fund Manager's caliber
their background, performance history, and approach.
3. Ratio of Expenses
Higher Net Return = Lower Expense Ratio
4. Risk and Returns Adjusted for Risk
Important metrics include the Brandt Ratio, Beta, and Standard Deviation.
5. Tax and Exit Load
There are tax advantages to long-term investments.
Ultimately, the quality, performance, and consistency of the fund are more significant than NAV.
What is NAV-Based Pricing and Entry Load-Based Pricing?
1. Pricing Based on NAV
Units are bought and sold by investors at this price.
Every day, this number get changed.
2. Entry-Load-Based Costing
In the past, the NAV was increased to sell units.
For investors' advantage, SEBI eliminated this in 2009.
What effect does a dividend have on the NAV?
The NAV drops by the same amount when a fund pays a dividend.
However, the investor's overall worth does not drop because:
👉 The NAV declines However, you get the same sum as the dividend.
Your income tax slab determines how dividends are taxed.
Conclusion (in simple terms)
NAV indicates the market value of a mutual fund, but it's wrong to base your investment decision solely on NAV.
A good fund is one that:
✔ Provides consistent returns
✔ Manages risk effectively
✔ Maintains a strong portfolio
✔ Demonstrates long-term stability
Therefore, whether the starting NAV is high or low—the criterion for choosing a good fund is its performance, not NAV.
FAQs
1. Does NAV change daily?
2. Does a lower NAV lead to higher returns?
No, NAV has no direct correlation with returns.
3. Where to check NAV?
On the AMFI website, Zerodha Coin, Groww, or
the fund hous
e's website.
4. Why does NAV fall when a dividend is received?
Because dividends are paid from the fund's profits.
