Net Asset Value (NAV): Meaning, Formula and Factors

Mutual funds are known for their good returns and diversification. However, before investing, one should first familiarise with some key concepts and terms. Among many other terms, Net Asset Value (NAV) is a vital one.

In this chapter, we will discuss every aspect of NAV, its significance for a mutual fund investor, the process for calculating it and the factors that impact it. In addition, we will discuss how to judge the  NAV before making an investment decision.

What Is the NAV?

The NAV is determined as the market value of the shares held by the fund minus the value of its liabilities. The NAV is calculated at the end of every trading day in a mutual fund.

The NAV tracks the current value of the purchasing power of the mutual fund’s portfolio. Its value changes depending on the reduction or increase in the price of the securities underlying the fund. Additionally, it is one of the essential criteria for investors to look for when deciding to invest in mutual funds.

How Do You Calculate NAV?

A mutual fund's “net asset value” is determined by calculating the aggregate value of the fund’s assets divided by the total number of its outstanding units. The formula for calculating the net asset value is as follows: 

NAV Formula

NAV = (Value of Assets – Value of Liabilities) / The Number of Parts Outstanding.

Now, let’s make an example to demonstrate the steps to calculate NAV. 

For instance, in the case where a mutual fund has total assets worth ₹10 crore but is liable for debts of ₹1 crore. This fund consists of 1 crore units in circulation. To calculate the net asset value of the fund, we would use the above-mentioned net asset formula: 

Net Asset Value = ((₹10 crore- ₹1 crore)) / 1 crore

NAV = ₹9

Therefore, the NAV of the fund is ₹9 per unit. 

Factors that Influence NAV 

Several factors can affect the calculation of the net asset value of a mutual fund:

• Market Volatility: The NAV of a mutual fund is weighed against the weighted average market value of the assets held by the fund. If asset prices rise, the fund's net asset value, in turn, increases, and in the case of a fall in prices, the fund's net asset value decreases accordingly.
• Expense Ratio: The expense ratio is the fee that the manager of the mutual fund company charges for management. As the expense ratio goes up, the net asset value of the fund becomes lower.
• Exit Load: Some mutual funds charge an Exit Load if an investor decides to sell its units. This is a charge that is deducted from the net asset value. This could decrease the value of stocks and equities, thus, that of an investor’s investment.
• Dividends And Capital Gains: If the mutual fund distributes the dividends or realises the capital gains due to selling assets, the measure of the manager's performance will fall. This is a result of the fees charged by these funds, which are deducted from the value of the fund’s assets.
• Sales Charges:  When an investor acquires mutual fund units, they might be subjected to sales charges or commissions. This charge is deducted from the NAV of the fund and thus drops the value of investors' investments.
• Fund Inflows And Outflows: When an investor buys or sells mutual fund shares, the amount of assets owned by the fund is affected. Thus, the net asset value of the fund can be affected, especially in the event that there is a large number of investors joining or leaving. If a fund witnesses more buy orders than sell orders, there will be an increase in the size of the assets. As a result, the net asset value increase is the consequence. On the contrary, when the fund sells more investors ‘shares than those it buys, it decreases the value of its assets— resulting in a downward indication of net asset value.

The NAV is the crucial thing that investors keep in mind because it shows the fund’s performance. It helps investors to trace the success or performance of the fund during a given time. This indicator further exposes the investment strategy of the fund manager and evaluates the performance of the underlying assets as well.

As an investor, you can use the NAV to track the investment’s performance and make choices to buy or sell units of a fund. As an example, if a fund shows a consistent rise in its ‘net asset value’ over some time, it could be a sign that it’s been performing well.

So, you should think about buying units to follow the trend. On the other hand, if the ‘net asset value’ has been getting lower, such a phenomenon could be a sign of the declining performance of the fund. Therefore, you may consider redeeming your units as well.

NAV in a Closed-Ended Fund vs an Open-Ended Fund

The ‘net asset value’ applies as long as it applies to closed-end funds and open-ended funds, but the way it works is often different in each.

In close-ended funds, the number of units is fixed, and the sale of these units happens on an exchange platform just like an ordinary stock, but the difference is that you can only invest in such funds during an NFO (New Fund Offering). The NAV of a close-ended fund is the sum total of all the fund assets divided by all the units issued. In this case, the change in NAV can only occur based on supply and demand factors of the underlying securities and stocks. 

In closed-ended funds, the number of shares is determined, and there are no new units issued. However, in open-ended funds, the units are issued and redeemed daily, and their number is not fixed and the NAV is almost always influenced by various factors that we discussed earlier. 

Why Should NAV Be on Your Mind When Making Any Investment Choices?

‘Net asset value’ is a useful metric intended to show the mutual fund's performance. So, you should know the NAV, and then you should make your investment decisions. Here are some reasons why:

• NAV is a performance index of a fund

The NAV in mutual funds stands for how the funds have done since a particular time. A higher net asset value signals a better-performing fund, while a lower net asset value usually indicates a poor fund.

• A tool used for analysing other funds

Investing in mutual funds is advisable to compare the fund’s performance to other funds to have a knowledge-based choice. NAV is an easy tool to compare the performance of different funds is what the NAV does.

• Highlights the perceived value of your product

The NAV stands for the total unlocked money that each unit of mutual funds possesses. Consequently, by multiplying the NAV by the number of units held, you can see how your present investment is valued.

• The cost of investments

Mutual fund investors should also consider the ‘net asset value’. A higher NAV or net asset value means the cost per unit is higher, while a lower NAV or net asset value means the cost per unit is lower. Hence, calculating the NAV is one of the ways of making the right deal to pay for the investment.

How to Check NAV?

You can check mutual fund NAV in various ways:

1. Mutual Fund Websites: Nowadays, many mutual fund companies own websites where they provide the current NAV published in the mutual fund schemes. The mutual fund company site can be visited and searched for the mutual fund NAV under the ‘Latest NAV’ section.
2. Financial News Websites: They are the sources for the latest NAVs of the said mutual fund schemes. Search for the fund’s name in the search tab and check the fund’s net asset value.
3. AMC’s Mobile App: Mutual fund companies have developed their mobile apps through which investors can get the current NAV of their schemes. 
4. Fund Fact Sheets: Structure fact sheets are published by mutual fund companies every quarter or month. These include information about the fund itself and the latest NAV among them. You can look at the fund fact sheet on the mutual fund company's website. Moreover, you can check the latest ‘net asset value’.

Then comes the question of what a good NAV is.

No specific number could be taken as a good Net Asset Value for mutual funds as it depends on many factors such as investment objective, fund category, and investment strategy.

To summarise, for successful fund management, the NAV must conform to the investment objectives, match the investor’s risk tolerance, be reasonable in terms of investment horizon, and also align with financial goals.

How To Track Your Fund’s NAV on Angel One?

You can easily track the NAV of the mutual fund units that you have bought on the Angel One App:

1. Simply go to your Mutual Fund section on the ‘PORTFOLIO’ page and click on ‘OPEN INVESTMENT DETAILS’.
2. Click on the mutual fund whose performance you want to see. You will find all the details of that fund, including its NAV.

What is Historic NAV? 

The expression "Historic NAV" refers to the Net Asset Value of a mutual fund scheme during an extended period. The fund's performance in the past and other extra information can aid investors in realising the fund’s investment strategy and performance track record.

Yes, you can watch for mutual fund NAV history before you begin to invest.

By going over the sold units of a mutual fund (known as its ‘net asset value’), you will be able to see the value of a fund. Thus, you can decide whether or not to invest in a particular fund. Still, you can also evaluate your investments any time you want.

Nonetheless, we mustn't neglect that the historic performance of the fund isn’t a base for future results and that investment decisions mustn't solely be anchored in past NAVs.

Conclusion 

NAV is a crucial decision factor as you invest in a Mutual Fund. It is the measure of the value of each unit of the fund, with the performance of the investment showcased over time. By understanding the fundamental concept of net asset value computation and the factors that influence it, you will be placing yourself in a better position to make every financial decision that you will make in a bid to achieve your financial goals. So, be on the lookout for NAV and invest smartly!

As we move to the upcoming chapter, you will learn more about how mutual funds function and how to analyse a mutual fund.