Mutual Fund Net Asset Value (abbreviated as NAV) is the price at which units of mutual fund schemes are bought or sold. Mutual Fund NAVs of schemes are re-priced daily based on the daily closing prices of the underlying securities in the scheme’s portfolios after making appropriate adjustments for the scheme’s expenses (we will discuss scheme expenses later in this article). The Mutual Fund NAVs are calculated by dividing the net assets (value of the securities and cash held by in the fund portfolio minus the liabilities) of the fund by the total number of outstanding units.
Mutual fund scheme units are priced at par value or face value at the time of the New Funds Offer (NFO). The face value of the unit is usually Rs 10. The money pooled from different investors, also known as Assets under Management (AUM) is then invested in a portfolio of financial securities like stocks, bonds etc. The scheme NAV goes up or down depending on the market value of the securities. Schemes which are older are likely to have higher NAVs compared to schemes that are new because the NAVs of older schemes have had more time to grow.
Did you know, you can now compare latest NAVs of any scheme with 52 week high NAV
For providing services like scheme distribution, fund management and administration etc., the AMCs incur expenses and charge a fee, known as expense ratio, to the unit holders to defray the expenses. Expense ratio is charged as a percentage of the mutual fund schemes assets or AUM for meeting such expenses. These expenses are charged proportionately against the scheme AUM and are adjusted in the unit price (NAV) of the scheme. Investors should note that, the Net Asset Value (NAV) of a mutual fund scheme is net of the expenses. Expenses of direct plans (which investors can directly buy without involving any intermediary) are lower than that of the regular plans when the investors buy mutual fund schemes through a mutual fund distributor. Therefore, the Net Asset Values (and returns) of direct plans are higher than that of regular plans.
There are several misconceptions with regards to mutual fund NAVs:-
- Schemes with higher NAVs are not necessarily expensive and schemes with lower NAVs are not necessarily cheap. The NAV of a scheme by itself should not be a consideration in investment decisions.
You can check the historical NAV of any mutual fund scheme from our research section - NFOs are not necessarily available at the cheapest price. NFOs are issued at par value (Rs 10 NAV). The at par value of a mutual fund unit is of no significance, because the unit by itself has no value as it derives its value from the underlying securities in the scheme portfolio.
- Schemes which pay high dividends do not necessarily give higher returns. Dividends can be paid only from the profits by schemes and dividends are adjusted from the NAV of the scheme. For example, if the NAV of a scheme is Rs 100 and the scheme declares a dividend of Rs 5, the NAV (ex-dividend) will fall to Rs 95 just after the dividend is declared. There is no benefit of investing in mutual fund schemes which declare big dividends from the point of view of total returns (dividends plus capital appreciation).
When evaluating a mutual fund scheme for investment, you should not focus on the scheme NAV. Instead you should critically study the past performance (total returns) over a sufficiently long period (at least 3 to 5 years for equity mutual fund schemes). If a scheme does not have a sufficiently long history (in case of new funds), you should see the performance of other schemes managed by the fund manager of the scheme. You should also try to understand the investment objective of the scheme as well the fund manager’s investment style and strategy before making your investment decision.
In this article, we have discussed what NAV is, how it is computed and some common misconceptions with regards to mutual fund NAVs. Armed with knowledge of how mutual funds work, you can make better investment decisions.
Check the latest NAVs of mutual fund schemes in India
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