Did you know the Mutual Fund industry was managing assets worth around Rs. 59 lakh crores as of May 31, 2024?
These assets not only comprise equity instruments but also include other asset classes such as bonds, debentures, government securities, etc. So, how would an investor know the value of each mutual fund scheme unit while investing?
This is where NAV in Mutual Funds is calculated. It stands for Net Asset Value. It is the NAV through which you will determine your investment and redemption value in mutual funds. Ultimately, you need to know NAV to find out the profit or loss in mutual funds.
So, let’s delve deeper into the nitty-gritty of NAV in mutual funds.
Net Asset Value (NAV) represents the market value of a mutual fund's assets after deducting all liabilities and expenses. To calculate NAV per unit, divide this value by the total number of outstanding units of the mutual fund scheme. This figure indicates the price of each mutual fund unit. Therefore, if the NAV displayed on a broker platform is Rs. 200, it means each unit of the mutual fund is priced at Rs. 200.
This value changes as per market conditions and is updated every working day. NAV is updated based on the closing price of the previous day. As per the SEBI regulations, every mutual fund is mandated to update its NAV by 9 pm every day.
NAV is the most crucial factor for Mutual fund investors as it decides unit allocation, buying/selling price and profits. The amount you invest in a mutual fund scheme is divided by NAV to find out the mutual fund scheme units to be allocated. For example, if you have invested Rs. 1,000 in a mutual fund which has an NAV of Rs. 10, you will be allotted 100 units of that mutual fund scheme. After buying the shares, the total holding value of your investment in Mutual Funds changes as per the change in NAV.
People often confuse NAV with AUM. AUM stands for Assets under management. AUM in MF schemes is the total value of all the assets that are currently managed by the mutual fund.
Here are the key differences between NAV & AUM for better understanding:
|
Basis of Differentiation |
NAV (Net Asset Value) |
AUM (Assets Under Management) |
|
Meaning |
It shows the market value per unit of the mutual funds. |
It shows the total values of assets managed by the mutual fund. |
|
Interpretation |
The buy/sell order of a particular mutual fund is executed based on NAV. |
It is the fund size that the fund manager of that particular mutual fund is managing on behalf of investors. |
|
Calculation |
It is calculated by deducting all the expenses and liabilities from the market value of assets held by the mutual fund. |
It is the sum of the market value of all the assets held by the mutual fund including shares, bank deposits, bonds, cash, etc. |
|
Value Fluctuation |
NAV changes every day based on the closing price of the previous day. |
A change in AUM is based on inflows and outflows in the mutual fund and changes in the market value of securities. |
A question arises about which day’s NAV will be taken while placing the buy/sell order. This query arises because the NAV is not updated on a real-time basis but based on the closing price. SEBI (Securities Exchange Board of India) has released rules for cut-off timings for Mutual Fund Transactions.
SEBI has provided a cut-off time of 1:30 p.m. for Liquid & Overnight funds. This cut-off time changes to 3 p.m. in the case of all other mutual fund schemes. This means that in case of a purchase transaction, if the mutual fund house received your money up to 3 p.m., NAV of that same business day would be applicable. If the money is received after this cut-off time, NAV of the subsequent business day would be applicable. Similarly, in the case of redemption of mutual funds, if the transaction is received up to 3 p.m., the mutual fund schemes will be redeemed based on same-day NAV.
The most common mistake by an investor is thinking that a higher NAV in a mutual fund validates its credibility. But, this is not the case. Choosing a higher NAV mutual fund hardly makes any difference in your returns.
Let’s understand this with an example. Suppose you have invested Rs. 1,000 each in both Mutual Fund A & Fund B. Mutual Fund A has an NAV of Rs. 10 whereas Mutual Fund B has an NAV of Rs. 50. You will be allotted 100 units of Mutual Fund A and 20 units of Mutual Fund B.
If the NAV of both mutual funds increases by 10%, the profit from both mutual funds will be Rs. 100.
Mutual Fund A’s profit = (11-10) x 100 = Rs. 100
Mutual Fund B’s profit = (55-50) x 20 = Ts. 100
So, don’t invest in a mutual fund just by looking at the higher NAV. Instead, consider other factors such as the fund's investment objectives, past performance, expense ratio, risk profile, and the reputation of the fund manager. It's important to align the fund's strategy with your own financial goals and risk tolerance before making any investment decisions.
NAV in mutual funds indicates the price of each unit but isn't the primary factor when analyzing mutual funds for investment. It's calculated based on the fund's assets under management (AUM), which includes the total value of its assets. A higher AUM suggests liquidity and builds trust, making it a significant consideration in decision-making.
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