NAV, also known as net asset value, is an important metric for those who invest in mutual funds. Understanding the basics of NAV is essential. In this article, we will cover all the important aspects of net asset value in simple language. Let’s get started.
Table of Contents
What is NAV in simple words?
NAV stands for Net Asset Value. It is the value of one unit of a mutual fund. Imagine you invest in a mutual fund, and this fund is like a big box containing different investments such as stocks, bonds, or other assets. Although mutual funds come with different schemes, the NAV is the price of one share or unit of that big box. It is calculated at the end of each day based on the value of all the investments inside the box, minus any expenses.
What does NAV tell you?
NAV tells you how much one unit of a mutual fund is worth at a given time. If you see that the NAV of a mutual fund has increased over time, it usually means that the value of the investments in the fund has gone up, so your investment has grown. However, if the NAV decreases, it indicates that the value of the investments has gone down.
How NAV is calculated?
NAV is calculated by taking the total value of all the assets in the mutual fund, subtracting any liabilities (like fees or expenses), and then dividing this by the total number of units or shares in the fund. Here’s a simple formula:
NAV = (Total Value of Assets – Liabilities) / Total Number of Units
Here is an easy example:
Let’s say you invest in a mutual fund in India that has a total value of ₹10,00,000 in assets, which includes stocks, bonds, and other investments. The fund has some liabilities, like fees and expenses, amounting to ₹50,000. The mutual fund has issued 10,000 units to investors.
To calculate the NAV:
- Total Value of Assets: ₹10,00,000
- Liabilities: ₹50,000
- Total Number of Units: 10,000
First, subtract the liabilities from the total value of the assets:
₹10,00,000 – ₹50,000 = ₹9,50,000
Now, divide this by the total number of units:
₹9,50,000 / 10,000 = ₹95
So, the NAV for this mutual fund would be ₹95 per unit.
NAV is calculated daily at the end of each trading day, and therefore, it changes on a daily basis.
Is Higher NAV Better or Lower?
Many people think that a higher NAV means a better mutual fund, but that’s not always true. NAV is just a reflection of the current value of one unit of the fund. What really matters is the overall performance and return on your investment. A mutual fund with a lower NAV could be a better investment if it grows faster.
What Happens When NAV Increases or Decreases?
- When NAV Increases: It means the value of the investments in the mutual fund has gone up. This is a good sign as your investment is growing.
- When NAV Decreases: It means the value of the investments has gone down. This could be due to market fluctuations or poor performance of the assets in the fund.
The Bottom Line
NAV is an important number that helps you understand the value of your mutual fund investment at a specific point in time. However, it does not matter whether it’s high or low. What really matters is how well the fund is performing overall and whether it aligns with your investment goals. Always prioritize the overall return and consider other factors like the fund’s history and management before making investment decisions.