If you comprehend the functioning of mutual fund NAV, you will be able to make better investment decisions. NAV is just the value of a single unit of a mutual fund. But what comprises this figure? And, why is it that this figure fluctuates on a daily basis? Let us analyse the topic in a very easy manner.
Through this guide, we will show you the calculation process of mutual fund NAV, factors influencing it, and lastly, its significance for your returns.
What Is Mutual Fund NAV?
The net asset value or NAV of a mutual fund indicates the price of a single unit of that mutual fund. So, when a mutual fund announces an NAV of ₹20, it implies that the price of one unit of that fund is ₹20.
NAV is a short form for Net Asset Value. It undergoes an update once every business day, normally after the stock market is closed. The daily price update of the NAV is done through a fixed process.
Calculating NAV (In Simple Terms)
When you want to know the process of NAV calculation, think of it as a huge financial box.
The content of the box includes,
- Shares
- Bonds
- Money
- Other belongings
Moreover, the fund has some costs, such as management fees.
The mutual fund unit price formula looks like this,
NAV = (Total Assets – Total Liabilities)/ Total units
Here is a simple example,
| Items in the Fund | Amount (₹) |
| Total assets | 10,00,000 |
| Total liabilities | 50,000 |
| Total units | 95,000 |
NAV = (10,00,000 – 50,000) ÷ 95,000 = ₹10 per unit
This simple example shows how NAV is calculated in real life.
What Affects Daily NAV Changes?
NAV does not stay the same. It moves each day because the market moves. Some major factors affecting NAV include,
- Change in share prices
- Change in bond values
- Fund expenses
- Market news
- Economic conditions
Here’s a quick table,
| Factor | Impact on NAV |
| Stock market rise | NAV increases |
| Stock market fall | NAV decreases |
| Higher expenses | NAV decreases |
| Interest rate changes | Affects bond values and NAV |
These factors affecting NAV play a big role in how your investment grows.
Why NAV Matters for You
The net asset value of the mutual fund plays an important role in deciding the price of your purchase or sale of fund units. However, it does not mean that a fund with a high NAV is better than a fund with a lower NAV. Many beginners think a fund with an NAV of ₹100 is better than one with ₹10. This is not true.
Among the considerations are,
- Fund performance
- Fund manager strategy
- Risk level
- Your goals
The daily NAV update process merely reflects the present worth of the fund, not its future performance.
Does a lower NAV imply cheaper funds?
Not quite. A low NAV is simply a sign that the fund has offered a greater number of units or is new to the market. The quality of the fund is based on its returns and not on its NAV.
For example,
- Fund A: NAV = ₹10
- Fund B: NAV = ₹100
Both can give you 10% returns. So, NAV should not be the main deciding factor.
How Investors Use NAV
Investors use the mutual fund unit price formula to understand how much value their investment holds.
For example,
When you buy 100 units at the NAV of ₹20, and later the NAV becomes ₹25, you make a profit.
Profit = (25 – 20) × 100 = ₹500
This example shows the importance of knowing how NAV is calculated.
Conclusion
The mutual fund NAV is simply the value of one unit of a mutual fund. It changes every day because of the factors affecting NAV and the daily NAV update process. By knowing how NAV is calculated, you can understand your investment value better and make smarter financial decisions. Remember, NAV is just a number. What truly matters is the long-term performance of the fund and how well it fits your goals.
