Mutual Funds, SIPs: What Is NAV? How Is It Calculated?

All about mutual fund NAV: Investing in mutual funds or SIPs is a popular choice for many seeking to build wealth over time. But while most investors are familiar with terms like "funds" and "returns," one key concept often gets overlooked – the Net Asset Value (NAV). Whether you're a seasoned investor or just starting, understanding NAV is crucial when you want to track the value of your investments.

What exactly is NAV?

At its core, NAV represents the price of one unit or share of a mutual fund. It’s the amount investors pay when buying units or receive when redeeming them. For example, imagine you buy a share of a mutual fund for Rs 10. If the NAV of the fund goes up to Rs 12, your investment is now worth Rs 12 per share.
Essentially, NAV tells you the value of the assets in the fund on a per-share basis, making it the go-to metric for evaluating mutual fund investments.

How is NAV calculated?

NAV might sound complex at first, but it’s fairly simple to understand. The calculation is made by subtracting the fund’s liabilities (debts and other obligations) from its total assets (cash, stocks, bonds, etc.), then dividing the result by the total number of shares outstanding.

The formula is:

NAV = (Total Assets - Liabilities) ÷ Total Shares Outstanding

Imagine a fund has assets worth Rs 50 crore, including securities and cash. If the liabilities (debts) amount to Rs 10 crore, the net assets would be Rs 40 crore. Now, if the fund has 4 crore shares in circulation, the NAV per share would be Rs 10.

When is NAV calculated?

Unlike stocks, which are traded throughout the day, NAV is calculated once a day, usually at the end of the trading day. This is because mutual fund prices depend on the value of the assets in the portfolio, and asset prices fluctuate during market hours. The NAV gives investors a snapshot of the fund's value at the close of trading.

While NAV is crucial for buying or selling mutual fund units, it doesn’t tell you everything about a fund’s performance. It’s primarily a pricing mechanism rather than a performance indicator. To assess a fund’s performance, you need to look at its total return — how well its investments have performed over time, including capital gains, dividends, and interest.

NAV and SIPs

For those investing through Systematic Investment Plans (SIPs), NAV plays an important role in determining how many units you receive for your regular investments. Let’s say you invest Rs 5,000 every month in a mutual fund. Depending on the NAV of that month, the number of units you buy will vary. If the NAV increases, you’ll buy fewer units for the same amount, and if it decreases, you’ll get more units.

Does NAV reflect a fund’s success?

A high NAV doesn’t automatically mean a fund is performing better than others. It simply reflects the value of the assets in the fund. To gauge a fund’s success, compare its NAV to the historical performance of the fund or other funds in the same category.