When you invest in a mutual fund, you don’t buy shares like in the stock market. Instead, you buy units of the fund, and the price of each unit is called the Net Asset Value (NAV).
What is NAV?
Net Asset Value (NAV) is the per-unit value of a mutual fund scheme. Mutual Funds are usually bought and sold on the basis of NAV. Unlike stock prices, that changes constantly during the trading hours, NAV is calculated at the end of each trading day. It helps investors determine which investment one might choose to withdraw or keep in their investment portfolio by providing a reference value.
Formula of Net Asset Value
Net Value of an Asset = (Total Assets – Total Liabilities)/ Total Outstanding Shares
- Total Assets include the market value of stocks, bonds, cash, and other investments held by the fund.
- Total Liabilities include expenses, management fees, and other payable amounts.
- Outstanding Units are the total units held by investors.
Why NAV is important?
- Determines the Entry and Exit Price
When investors invest in a mutual fund, the NAV determines how many units are allotted.
For example:
NAV = ₹20
Investment = ₹10,000
Units allotted = 500
Similarly, during redemption, the applicable NAV determines the amount received.
- Reflects the Fund’s Daily Performance
NAV changes based on the market value of the underlying securities.
Rising NAV: Increase in portfolio value
Falling NAV: Decline in portfolio value
NAV movement reflects the day-to-day valuation of the fund’s holdings.
- Helps Track Investment Value
The total investment value is calculated as:
Number of Units × Current NAV
If an investor holds 500 units:
At ₹20 NAV, Value = ₹10,000
At ₹25 NAV, Value = ₹12,500
- Tracks fund performance over time
NAV movement reflects how the fund’s portfolio performs over a period.
For example:
Earlier NAV = ₹20
Current NAV = ₹25
Increase per unit = ₹5
If an investor holds 500 units:
Value at ₹20 NAV = ₹10,000
Value at ₹25 NAV = ₹12,500
The change in NAV over time indicates the growth (or decline) in the fund’s underlying investments.
Role of NAV in Performance of a Fund
NAV plays a central role in reflecting a fund’s performance because it represents the per-unit value of the underlying portfolio. Any change in the market value of the securities held by the fund, whether equities, bonds, or other instruments, directly impacts the NAV.
When the fund’s investments appreciate, the NAV rises. When the portfolio value declines due to market movements, the NAV falls. Therefore, tracking NAV over longer time horizons helps investors evaluate growth trends, consistency across market cycles, and the fund’s ability to generate value over time.
While NAV does not predict future returns, its movement serves as an indicator of how effectively the fund’s strategy has performed historically.
Is NAV important for SIP Investors?
For Systematic Investment Plan (SIP) investors, NAV plays a different role.
When markets fall:
NAV decreases. Investors get more units for the same investment amount
When markets rise:
NAV increases. Investors get fewer units
Over time, this leads to rupee cost averaging, which can reduce the impact of market volatility.
What does lower NAV mean?
Many investors believe a fund with a lower NAV (say ₹15) is “cheaper” than one with a NAV of ₹150.
This is incorrect.
NAV is just the per-unit value. It does not indicate whether a fund is expensive or cheap. What matters more is:
- Portfolio quality
- Fund strategy
- Expense ratio
- Risk level
- Consistency of returns
Just like in stocks, a lower price does not automatically mean better value.
What does higher NAV mean?
A high NAV simply means the fund’s assets have grown over time. A new fund may start at ₹10 NAV, while an older fund may have ₹300 NAV.
What truly matters:
- CAGR (Compounded Annual Growth Rate)
- Risk-adjusted returns
- Portfolio consistency
NAV alone doesn’t tell the full story.
Final thoughts
Net Asset Value is a fundamental metric in mutual fund investing, serving as the basis for valuation, transaction pricing, and performance assessment. It provides a transparent measure of a fund’s per-unit worth and reflects the daily impact of market movements on the portfolio.
A well-informed approach, with platforms like Flattrade enable investors to track NAV movements efficiently, monitor portfolio value, and make informed decisions based on structured analysis rather than assumptions.
