Why You Should Know the NAV Before Choosing a Mutual Fund
According to the Association of Mutual Funds of India, the Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry stood at ₹25,60,423 crores in September 2019. Mutual fund investments can be the most effective means of wealth creation. However, to make an informed investment decision, you need to first understand various aspects of such funds. One such key aspect is the Net Asset Value (NAV).
Net Asset Value is the mutual fund’s market value per unit. This is the price at which investors purchase units of the fund. The number of units you can buy is important because the price will be based on the NAV. In simple words, just like stocks have a share price, mutual funds have NAV. Usually mutual funds in India begin at a cost of ₹10 per unit and increase with the fund’s assets under management. Therefore, a popular fund will have a higher NAV than a less popular one.
Net Asset Value does not change all the time, unlike share prices. They get updated only at the end of each trading day. For most open-ended mutual funds, NAV is a good way of tracking the unit price movements.
How is NAV Beneficial in Fund Performance?
Often investors make the mistake of believing that funds with lower NAV are a better investment option because they are cheaper. But the truth is that it does not indicate the mutual fund performance. Even if there is a big difference in the NAV of two funds, it is not the right indicator of how the funds are performing. What you need to look out for is the returns, while keeping the investment timeframe in mind. NAV is basically useful in analyzing how the funds are performing on a specific day. It is not a measure of how profitable a fund is.
How is NAV Beneficial for Investors
It is important to understand that a mutual fund in India at ₹20 is not economical as compared to the one at ₹30. This is because net asset value and the price of a unit are not the same. If both the funds have the exact same portfolio, then NAV will not make a difference to the price of investing in the fund.
How is NAV Calculated
If a mutual fund has an NAV of ₹100, then that is the amount you will have to pay for a single unit of that fund. This is the general NAV calculation method. The other is the daily NAV calculation. The stock market shuts down at 3:30 pm on weekdays and opens again on the following weekday, with the previous day’s closing share price. The fund house deducts payables and expenses using the following formula to determine the NAV of the day:
Net Asset Value = [Assets – (Liabilities + Expenses)] / Outstanding Units
So, apart from the NAV, also research on the fund’s past performance before investing.
