How Important is NAV for Valuing Mutual Funds?

4 Sep 2019  Read 1290 Views

Whenever you plan to buy a mutual fund plan for yourself, the term that must have definitely caught your attention would be the Net Asset Value (NAV). This article is thus an attempt to answer intriguing questions related to the entire concept of the Net Asset Value. (NAV)

What is Net Asset Value (NAV)?

Mutual Funds refers to a professionally managed basket of funds created using pooled money from a variety of investors. When you divide the total value of this basket after adjusting for liabilities by the total number of units in the basket, you arrive at the per-unit cost of funds which is precisely the Net Asset Value (NAV) of the mutual fund scheme. Thus in simple terms, NAV represents the amount that you need to pay in order to purchase one unit of the mutual fund.

The NAV of a mutual fund scheme rises with the rise in assets under management (Total assets held by a mutual fund scheme). Since mutual funds are based on the market value of securities, the NAV of a scheme also varies from day today.
Mutual Funds are required to disclose their NAV on a daily basis. The NAV’s are declared every day at the end of the day on the basis of the closing price of securities. The NAV per unit of all mutual fund schemes has to be updated on Association of Mutual Funds in India’s(AMFI) website and the Mutual Funds’ website by 9 p.m. of the same day.

How is NAV calculated?

The total assets of a mutual fund scheme constitute the market value of all the securities held in the portfolio, cash and accrued income.

The current liabilities and expenses incurred in building up and managing the portfolio and servicing the investors are deducted from the total assets to arrive at net assets.
The Net Assets are then divided by the total number of units held by the mutual fund scheme on that particular day to arrive at the NAV.

Mathematically, NAV would be represented as:

NAV= Total Assets- (Liabilities+ Expenses) /Total number of units.

How do mutual funds decide to allocate NAV?

It all depends upon the cut off time for submission or receipt of application. If you invest before the cut off time, you will get the NAV of the end of the day of that particular business day. However, that does not mean that you cannot invest after the cut off time. In case you decide to invest the cut off time, you will get the NAV of the next business day.
The same cut off rules applies to redemptions too. The cut off time for all purchase transactions of mutual funds other than liquid funds is 3 pm.
Simply, when you place an order for the mutual fund scheme, you will be able to place it at the NAV of the previous closing day. However, your order will get executed at the NAV of the current business day.

Say, NAV of scheme A on the previous day was Rs 10. If you want to invest Rs 20,000 in the scheme, that would mean that you will get 2000 units of Scheme A.

What if the NAV of the scheme rises to 20? This would mean that your order will be executed at Rs 20 and you will receive 1000 units of Scheme A.

Similarly, if you wish to redeem your units, chances are that you might not get the day’s NAV. 
As per SEBI guidelines, the NAV of Liquid Funds and Other Funds is determined differently as per the guidelines are given below:

Does high or low NAV matter?

Have you come across the common misconception that NAV is the same as the market value of the equity share? This, in turn, gives rise to the perception that a fund with lower NAV is economical when compared to the fund with a higher NAV. 
It is important to understand how the price of an equity share is determined in the market. It is through the forces of demand and supply. Thus, it changes almost every second and the price of the stock is different from its book value.
However, the NAV of a mutual fund is the book value of a unit. We buy mutual fund units at their book value. There is no such thing as the concept of demand and supply. The NAV fluctuates only on a daily basis. Thus, there is no such thing as buying low or selling high in case of mutual fund schemes.

Consider this example:

Suppose you have Rs 10,00,000 which you can invest in two mutual fund schemes say A and B.

Suppose, scheme A has a NAV of Rs 100 and scheme B has a NAV of Rs 500. This means you can buy 10,000 units of scheme A and 2,000 units of scheme B.

After one year, suppose both the schemes grow equally by say 25%. This means NAV of scheme A and scheme B after 1 year would be Rs 125 and Rs 625 respectively.

The value of your investment would now be 10,000*125= Rs 125,000 and 2000*625= Rs 125,000.

Thus, we can observe that even though the NAV’s of both the schemes are different, the returns are the same for both the schemes.

Thus it is not the absolute value of NAV, but the change in NAV of a scheme is what is relevant.

Is NAV the only criteria to evaluate a fund’s performance?

According to the discussion above, we can figure out the fact that NAV can only impact the number of units you will receive a particular fund. NAV of a fund does not reveal any information regarding the future prospects of the fund. Higher NAV simply indicates that the scheme’s investments have fared up really well.

Some of the relevant factors that should be considered while evaluating a fund’s performance are:

  • Risk appetite: If you are risk-averse and want guaranteed returns you should go for debt funds. However, if you are aggressive and wish to gain higher returns, equity funds are essential. However, if you wish to assign a certain portion to both debt and equity, hybrid funds are what you should look for.

  • Expense Ratio: This ratio basically depicts the fees paid to the fund house for managing the mutual fund. It is important to analyze it because ultimately this ratio depicts your returns in the end.

  • Alpha: It is another barometer that depicts how well the fund has performed with respect to the benchmark indices. If the fund outperforms the benchmark index, we can say that the fund is performing well and the excess return generated is termed as alpha. However, if a fund underperforms the benchmark index, the probable reason could be the bearishness of the market. However, it might also be possible that the fund manager has failed to venture into profitable investment avenues.

  • Beta: Beta represents how well the fund has performed with respect to the markets.

  • Sharpe Ratio: This ratio measures the return earned over and above the returns generated through risk-free securities. It measures how much additional risk the fund has taken by investing in risky assets. The risk inherent in an investment is depicted by the standard deviation.

Mathematically, Sharpe Ratio = (Average fund returns – Risk-free Rate) / Standard Deviation of fund returns.

A higher Sharpe ratio is ideal since it indicates optimal risk-adjusted-performance.


NAV should definitely be not the sole criteria when it comes to evaluating a fund’s performance. A holistic approach is what is required when it comes to choosing an appropriate fund. The market is overruled by speed, rather than size. People look for quickest money-making instruments and not the one that gives them the biggest gain.  
For bigger gains, do read our blogs regularly.  One should always try to learn the maximum and earn without losing any.

About the Author: Gaurja Newatia | 24 Post(s)

Gaurja is a Business Economics Student|Finance Enthusiast|Avid reader|

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