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Mutual Fund Net Asset Value – NAV Mutual Fund Calculation & Importance in 2022

There’s more to a mutual fund NAV calculation than meets the eye. What does it tell you about the fund’s performance, portfolio, future growth?

All investments involve, amongst several metrics, a cost price. In the case of stocks, for example, the price is simply the market traded price. In currencies, the price is the currency’s value relative to another currency. Ever wondered how mutual funds signify their value? They are, after all, a collection of several of the same such assets. The term we use, which you may be familiar with, to denote the value of a mutual fund scheme is NAV.

What is Mutual Fund NAV?

The NAV is the abbreviation of Net Asset Value, sometimes also called net value or net book value. A mutual fund NAV is the market value of a single unit of a mutual fund scheme at a certain date and time. In other words, it’s the price an investor has to pay for buying units of a particular mutual fund or receive while selling units back. The total cost of a mutual fund at a specific time, therefore, depends on its NAV.

The asset management company (AMC) for a mutual fund calculates its NAV daily as the market closes for the day. The calculations take into account the closing market prices of a mutual fund scheme’s underlying portfolio. In other words, you can use the NAV to keep track of a fund’s performance on a regular basis.

How to Calculate Mutual Fund NAV

Underlying assets in mutual funds are generally classified into two categories – securities and liquid cash. Since said securities include both bonds and stocks,  the total asset value of a fund will account for the market values of its stocks, bonds, and cash. Stemming interests and dividends also count as assets.

Determining a mutual fund NAV is very simple. Just follow the formula below:

Mutual fund NAV

 = {Total assets – (total liabilities + expenses)} / number of outstanding units

Where total assets = market value of the mutual fund investments + receivables + accrued income

So essentially, to calculate a mutual fund NAV, you need to sum up the market values of all the units in a particular mutual fund and divide it by the total number of units.

Let’s suppose a mutual fund holds total assets worth INR 130 crores, the sum of total liabilities and expenses is INR 2 crores, and the number of units is 10. In this case, the mutual fund NAV would be INR 12.80.

However, there are still other approaches to agreeing on the NAV

Types of Mutual Fund NAV Calculations

A mutual fund NAV can be calculated in two ways:

  1. Daily Calculation: All mutual fund corporations appraise the net worth of their portfolio once the stock market closes every day - typically at 3.30 pm. The market reopens the next day with the closing prices of the previous day. Accordingly, the fund house subtracts all the outstanding liabilities and expenses to determine the NAV for the day using the aforementioned formula.
  2. General Calculation: The general NAV of a mutual fund is the total value of its equity shares. However, these prices are susceptible to change due to market fluctuations.

With us so far? The NAV of a mutual fund can seem like a fairly accurate equivalent of stock prices. But this isn’t really the case. The two metrics have some clear distinctions.

NAV for ETFs

Since ETFs and closed-end funds trade on exchanges like stocks, their shares might have a market value that is a few dollars/cents more (trading at a premium) or lower (trading at a discount) than the real NAV. This provides attractive trading chances to active ETF traders who are able to detect and capitalise on such opportunities in a timely manner. ETFs, like mutual funds, determine their NAV on a daily basis at market close for reporting purposes. They also calculate and disseminate intra-day NAV in real-time many times per minute.

NAV and Trade Timelines

It's worth noting that, while NAV is calculated and displayed as of a specific business date, all mutual fund buy and sell orders are executed according to the cutoff time at the NAV of the trade date. For example, if the regulators set a 1:30 p.m. cutoff time, all buy and sell orders received before that time will be executed at the NAV on that date. Any orders received after the deadline will be handled using the next business day's NAV. 

Example of NAV Calculation

Assume a mutual fund has a total investment of Rs. 100 million in various assets, which is determined using the day's closing prices for each asset. It also has Rs. 7 million in cash and cash equivalents and Rs. 4 million in total receivables on hand. The whole day's earnings are Rs. 75,000. The fund's short-term obligations total Rs. 13 million, with long-term liabilities totalling Rs. 2 million. The day's expenses have totalled Rs. 10,000. The fund has a total of 5 million shares in circulation. The NAV is determined using the formula above as follows:

NAV = [(Rs. 100,000,000 + Rs. 7,000,000 + Rs. 4,000,000 + Rs. 75,000) - (Rs. 13,000,000 + Rs. 2,000,000 + Rs. 10,000)] / 5,000,000 = (Rs. 111,075,000 - Rs. 15,010,000) / 5,000,000 = Rs. 19.21

The mutual fund shares will be traded at Rs. 19.21 per share on the stated day.

The Difference Between NAV and Stock Prices

A common error many investors make when starting out is assuming that the NAV of a mutual fund and the stock price of a company are similar in nature. Sure, both of them do have a few things in common, for instance: the NAV represents the book value of a mutual fund - as in the total value of its assets. Similarly, a company’s stock price represents its book value as well.

However, a significant difference between NAV and stock prices is that while stock prices can be influenced by investors within the stock market, the NAV of a mutual fund unit cannot be directly affected by investors. A higher demand for, or a big sell-off in a mutual fund will have absolutely no impact on its NAV. For mutual funds, the notion of the whole fund’s market price does not even exist.

Also, unlike stock prices, a mutual fund's NAV does not really shift throughout the trading day since the NAV is calculated only once a day after the market closes. As a result, from an investor’s perspective, a mutual fund's NAV can usually change only once on a daily basis. All mutual fund units purchased or redeemed on a particular day are traded according to that day's NAV. So while market demands can alter stock prices, they can not change the NAV of a mutual fund in real time.

So What Really is The Significance of Mutual Fund NAV?

Again - the Mutual Fund NAV represents the value of a mutual fund’s underlying assets. When the prices of said assets are high, the fund NAV is also high. Similarly, if the total price of the assets is low, the fund NAV is low.

As you may have guessed, the calculation of a mutual fund does not say anything about its performance relative to other funds. The value of a stock price might suggest how it’s performing, or whether it’s affordable. But a lower mutual fund NAV does not automatically make it a cheaper and more advantageous investment option. Neither does a higher NAV imply the opposite  .

The mutual fund NAV only impacts the number of units you buy. If you have Rs 1000 to invest, you will receive fewer units if you select a scheme with a high value and more units if you take a lower value mutual fund. However, the total value of your investment remains the same in either case.

A mutual fund’s NAV is useful when it’s being compared to its historical value. In such cases, it reflects how a mutual fund’s underlying assets have performed in the past. For instance, a relatively high value suggests that the investments made in that particular mutual fund scheme have burgeoned well enough, or the plan has been functional for quite a long period. So, investors should always keep in mind that a mutual fund’s NAV is not the only parameter they should be considering to choose the right investment option for themselves.

That being said, NAV sure has its uses all the same. For example, when choosing between direct or regular funds of mutual funds, NAV can be a prime factor to consider. The NAV of a direct plan is always higher than the regular plan NAV.

The AMC also deducts expenses from the mutual fund’s total asset value, covering management fees, administrative costs, distribution fees etc. This is called the expense ratio. Therefore, it’s obvious that when expenses are higher, the NAV of a mutual fund is lowered.

In case of regular mutual funds, there is an intermediary (bank or distributing agency) between the investor and the AMC, who charges a fee for their services. This, in turn, increases their expense ratio, resulting in a lower NAV. On the other hand, direct mutual fund plans don’t involve distribution fees. So the NAV of a direct mutual fund scheme is higher .

Similarly, while deciding between a mutual fund with a growth option and a fund with a reinvestment option, you should consider their NAVs. Why, you ask? Well, let’s find out, shall we  ?

Mutual Fund Growth Plans vs. Dividend Plans, and Their Effect on NAV:

The growth plan of a mutual fund signifies that if you invest in that fund, you don’t receive any dividends that might be paid out from the stocks in its portfolio. Instead, the fund house reinvests the dividend money in more assets. This increases the mutual fund NAV and translates into a comparatively higher capital gain whenever you decide to sell your mutual fund units.

On the other hand, the dividend reinvestment option redirects the investors’ dividends towards purchasing more shares in the mutual fund on their behalf. This option doesn’t contribute to the fund’s NAV as much as the growth mutual fund. Therefore, the NAV of the mutual fund dividend scheme is generally lower than that of a growth option.

Hopefully, it’s clear to you that the mutual fund NAV is one of the most important and useful metrics to decide on the ideal mutual fund investment Simultaneously, it isn’t very wise to entirely base your investment decisions on the NAV of a mutual fund scheme. Do evaluate more data on your mutual fund - like past returns and risk profile, and plan out your mutual fund investment by contemplating your own investment goals, risks you’ll be taking, and other such factors before making an investment decision .

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