Understanding NAV in mutual funds?

NAV or the Net Asset Value is per unit value of mutual fund. It determines the buying and selling price of fund units, reflects fund performance, and ensures transparency. It is calculated at the end of each trading day, providing daily value of the fund.

You can also say the net worth or the capital of the company is the difference between the assets and liabilities of the company. The valuation and pricing of investment fund are based on their calculation of NAV, making it an important part of fund management.

Per share value of NAV makes it easier for the investors to understand the value and conduct buying and selling of shares.

Formula for calculating NAV

1. Total Assets: are the market value of all securities in the fund's portfolio, cash, and any accrued income.
2. Total Liabilities: These are the fund's expenses, fees, and any outstanding obligations.
3. Outstanding Units: The number of units issued by the mutual fund that are currently held by investors.

NAV=       total assets – total liabilities

                      Outstanding units

For example: - if mutual fund has total worth ₹100 mil asset, total liabilities of ₹10 mil and ₹9 mil outstanding units.

NAV= 100,000,000- 10,000,000     = ₹10

                    9,000,000

Mutual fund and NAV

Money is collected in large sum by investors for mutual funds. And is invest in securities, such as stocks, bonds and money market instruments. As per the amount spent each invest gets a number of shares. The pricing of each share determined by NAV.

Where you see stock prices getting revealed throughout the day. Prices of mutual funds are based on daily closing price of securities of the fund.

Factors affecting NAV

1. Market fluctuation

The value of NAV is directly affected by how the underlying investment is performing. When the price of the stock rises, the funds stock holding become more valuable increasing the value of NAV. On the other hand when the stock prices are falling

2. Capital gains

When assets are sold at a profit, it’s considered as capital gain. The fund basically made profit on a sale of an asset, it’s considered as income. This can be distributed or reinvested. If it’s distributed the value of NAV will fall and if it’s reinvested it might remain unchanged or end up increasing.

3. Expenses

Various expenses such as management fees, administrative cost, and transaction fee. Overall return of the funds might reduce you to these expenses. The fund’s performance might get affected by high expense ratios.

4. Fund inflows and outflows

The cash flow coming in and out of a fund may also affect NAV if you buy more shares than the NAV increases as the fund has more money to invest on the other hand, when shares are sold, NAV may decrease the fund has less money to invest

5. Currency exchange rates

Some funds invest in foreign securities, which currency difference can play an important role. If the value of foreign currency increases the funds base currency, the NAV will also increase on the other hand of the foreign currency decreases. The NAV will also decrease.

Disclaimer: I should be stating that, I am not SEBI certified Research Analyst, do your own due diligence before investing or ask your investment advisor.